January 2013 Newsletter

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Dr. Jeffrey Ross’s

Investment & Healthy-Living Advisory

January 2013

Contents:

— The Makings of a Movement

— Can Businesses or Products be Movements?

— A Rare Company that is also a Movement

— Invest in the Next Leg of this Worldwide Phenomenon

— Healthy-Living: Explosive Power Training

— A Final Word: BP

— Current Investments for the Long-Haul Portfolio

The Makings of a Movement

All great movements start with a vision.

Once people grasp the vision they join the movement, and the movement grows.  Most movements in a nation are political, social, religious, or some combination of the above.

Being a part of a growing movement is exciting—even electrifying.  Growth starts out small, but soon becomes exponential, seemingly incomprehensible.  What once was just an obscure idea in the mind of a man or woman is now growing like bacteria on a petri dish.

Can Businesses or Products be Movements?

Companies are almost never movements.  Their products rarely may be.

I’ve been racking my brain lately to come up with any businesses that could qualify as a movement in my lifetime.  Some, such as Coca-Cola (NYSE: KO), Disney (NYSE: DIS), and McDonald’s (NYSE: MCD) have an enduring history of expansion and stability, which are virtuous qualities for investors to seek.  But while it is possible that these companies (or their products) qualified as “movements” in their infancy, they are presently just great companies.

Facebook (NASDAQ: FB), as a product, is a legitimate worldwide movement, but it is having a difficult time proving to investors that it can produce—and sustain—profits.  This is typical of popular companies (especially internet companies) that provide services to the masses “for free.”  While it is free for you and me to network socially on their sites, it is certainly not free for them to maintain their wonderful product.  For profits, Facebook (and similar companies) typically need to turn to advertisements, which increase revenue but decrease the simplicity (and trustworthiness?) of the original design.  Because of this tension, buying shares of Facebook today is not investing, it is speculating (i.e., gambling).  As such, these speculators are as likely to lose all of their money as they are to win big.  Unless you have $millions to spare (and lose), don’t be a speculator.

A Rare Company that is also a Movement

If you are from small-town America you may not know much about this company . . . or what’s up with all the fuss.  If you are from a mid-sized city, you know of it and may be hooked or indifferent.  If you live in a major metropolitan region of the Western Hemisphere you are either blissfully surrounded or annoyingly inundated with this month’s recommendation.

May I introduce (or re-introduce) you to Starbucks (NASDAQ: SBUX)—one of our generation’s biggest movements and your next Investment for the Long-Haul.

I’m old enough to remember the Starbucks invasion across the Midwest in the early 1990s.  I also distinctly recall saying to both friends and family, “Who would ever pay more than $1 for a cup of coffee?  And $3 for a latte?  I don’t even know what that is.”

You see, back then a bad cup of coffee could be obtained in any restaurant or gas station for about 25 cents.  It was often made by some old dude who didn’t see any reason not to re-use the coffee grounds from the previous batch.  And, as usual, you got what you paid for.  People wouldn’t consider paying much for coffee back then because it often tasted like recycled dirt.

Over the next few years, however, the movement started to creep into our psyches.  The trendy, well-to-do types began walking around with their mermaid-laden cups of coffee that tasted “burnt” or “too strong” for our virgin palates.  We were curious.  We were intrigued.  We wanted to be like that trendy person.  No, we wanted to be that trendy person!  So we held our noses and sucked down our first latte.

We were hooked.  The vision latched onto our minds and hearts, and the movement rolled on.

In the U.S. today, many of our dates, business meetings, and study hours are spent sipping coffee and eating pastries at the local Starbucks.  Everyone knows where the nearest one is and everyone wants to be there.  In fact, I’m sitting in a local Starbucks now, crammed elbow-to-elbow at a long table with 9 or 10 other patrons who are also ecstatic to have found a place to sit.

The service is top-notch.  The quality of the java is consistently wonderful.  The baristas are very busy, and happy to be part of the action—if only for the health care benefits they receive working part-time.  I know the feelings they are experiencing, as I was a Starbucks barista in 1996.

Invest in the Next Leg of this Worldwide Phenomenon

We all know that Starbucks was a major growth company in the 1990s and early-2000s.  However, under different leadership in the mid-2000s, its performance seemed to sputter.  But since the so-called Great Recession it has experienced a renaissance and has recaptured its highly-caffeinated, fast-paced growth in the U.S. and around the world.  It is not a coincidence that its deeply personable, highly motivated Chairman and CEO, Howard Schultz, returned to the company’s helm after a several-year hiatus to restore the vision.

Upon Schultz’s return dysfunctional stores were closed and dilapidated ones were given facelifts.  Customer service was returned to its rightful top position on the priorities list and new growth initiatives were birthed.  These include VIA instant coffee, Starbucks K Cups, the Verismo single-serve machine, as well as the recent acquisitions of Evolution Fresh, La Boulange Bakery and—most recently—Teavana, to seriously enlarge their footprint in the $40 billion worldwide tea industry.

Schultz’s great tea initiative brings us to Starbucks’ desire to land the eastern world’s two biggest fish: China and India.  Boldly, like the coffee blends it became famous for, Starbucks plans to open 1,500 stores in 70 cities in China by 2015.  China already is on track to becoming the second-largest Starbucks market sometime in 2014.  Obviously, this is an enormous market that—once tapped—could potentially dwarf the U.S. in both patrons and profits.  Fortunately for us, growth in the Middle Kingdom has really just begun, which makes it a great time to be an investor.

India remains fraught with political pressures to keep foreign companies out, making it a more difficult population to penetrate.  However, progressive legislators are currently working hard to change this anti-free-trade climate for the benefit of the entire Indian economy.  Once this occurs—and I’m confident that it will—you can be sure that Starbucks will be one of the first international businesses to jump in and hit the ground running.  Evidence of this can be found in the “hugely successful” opening of Starbucks’ first three stores in Mumbai, India, in October.  Delhi will get its first glimpse of the white-and-green mermaid logo in early 2013.

Comparisons?

The most difficult part of this essay is in finding a suitable (no, legitimate) comparison for our Seattle-based behemoth.  Caribou Coffee (NASDAQ: CBOU), a festive, Minneapolis-based coffee company, has been perking up its loyal customers since 1992.  Now with greater than 600 coffeehouses in 22 states, the District of Columbia, and ten international markets, this endearing company has seen respectable growth since its conception near the North Woods.  Relatively commonplace in the upper Midwest, Caribou Coffee has a smaller presence through
out the rest of the U.S.  Let’s see how it measures up to our monthly selection:

Comparison Stocks SBUX (Starbucks) CBOU (Caribou Coffee)
Market Capitalization $39.5B $245.0M
Forward P/E 20.3 22.9
Dividend Yield 1.6% 0
Book Value Growth (5 years) 17.1% 1.1%
Revenue Growth (3 years) 10.8% 8.7%
Return on Assets 17.1% 7.6%
Return on Equity 27.1% 10.6%

Starbucks is the more attractive investment using almost any metric.  Even though it is 161x larger than Caribou, it is still experiencing equal or higher growth—an amazing feat!  Its enviable Return on Equity (or “bang for your buck,” as I like to say) of 27% finely grinds its humble competitor.

So, while Caribou’s Turtle Mocha will always remain my $4 sentimental favorite, the remainder of my investing dollars will go towards owning additional Starbucks stock.  Yours should, too.

Buy Starbucks (NASDAQ: SBUX) up to $55.

For the safe options investors among you, I highly recommend selling (to open) naked puts on SBUX on any significant drops in its price and on high volatility days.

Healthy-Living

Each month I will provide tips to improve your health.  This will include simple, yet effective, exercise regimens; nutrition advice; healthy sleep and lifestyle habits; and new research on cutting-edge medical technology.

Once again, this month’s feature is written with the New Year in mind by Explosive Power Training.  Follow Explosive Power Training on Twitter for brief—yet intense and highly effective—exercise plans and nutrition advice: @expowertrain.

Just Do It

Last month we discussed how easy it is to exercise effectively and efficiently without fancy gyms, trainers or programs.  As the old saying goes: Just Do It.  This month we’ll take that same approach to diet.

Improving your diet is very similar to implementing an exercise program.  In both circumstances it usually falls by the wayside for a variety of predictable reasons.  We either don’t really want to improve, or we don’t know how to improve.

The Want-To is up to you.  Nobody else can instill that in you.  The knowledge, on the other hand, is the easy part with which I will help.  Once you’re ready to change, you will find it’s not rocket science.

We all know the bad decisions when we make them.  Simply begin eliminating as many of these as possible, as often as possible, and you will make tremendous strides toward your goals.  Let’s all join hands and take a stroll down Guilt Trip Lane as we look at three factors that trip us up from achieving our goals: Alcohol, Garbage Food, and Conventional Wisdom.

Alcohol: The single greatest barrier to improved body health and composition.  While alcohol can be fun, it also makes you fat and deteriorates your health.  The more you cut out, the more cut you will become.  Bottom line.

Garbage Food: This includes fast food and almost everything in the middle of the grocery store.  Eat real food.  Real food has an ingredient list of one. Beef.  Chicken.  Fish.  Broccoli.  Spinach.  Eggs.  Almonds.  Olive oil.  Avocado. Coconut oil.  (Yes, the heavily saturated fat in coconut oil is good for you. The Coconut Oil Miracle is a fantastic read if you would like to learn more.)

Conventional Wisdom: Ignore it.  It tells you fat is bad.  It tells you egg yolks will kill us.  It tells you wheat should be the cornerstone of our diet.  (The book, Wheat Belly, could change your life.)  It tells you red meat will kill you.  It tells you to replace butter with a yellow chemical made in a laboratory.

So-called “conventional wisdom” is the single greatest enemy to American health and well-being.  In future newsletters we will explore the fallacies of conventional wisdom in greater detail.  In the meantime, decide to eat real, whole food and minimize alcohol and junk food.  Just Do It.

Check out more from Explosive Power Training on Twitter at: @expowertrain

A Final Word: BP

Now that we have a whopping two stocks in our “Investments for the Long-Haul” portfolio, I want to say a quick word about our selections.  Though both highly traded stocks, BP (last month’s pick) and SBUX represent two very different investment strategies—which adds some diversification.  As I spelled out above, Starbucks has returned to high-growth mode and will likely tack on lots of capital gains for us over the next 5-10 years.  Conversely, British Petroleum (NYSE: BP) is our low-growth, high-yield investment—offering limited downside risk, growing dividends and encouraging long-term (10+ years) prospects as it works hard to right its wrongs.  In light of this, I want you to think of BP not as a “hot stock pick,” but more like a steady, safe, high-yielding “bond.”  Buy it, reinvest the dividends, and forget about it.  In 10-20 years you will be pleasantly surprised!

Investments for the Long-Haul

Prices as of Dec. 16, 2012

Security Symbol Ref. Price Ref. Date Current Price Total Return* Status
British Petroleum BP $41.22 11/20/12 $41.39 0.4% Buy up to $45
Starbucks SBUX $53.36 12/16/12 New Buy up to $55
 
 
 
 
 
 
 

*Includes dividends.

Disclosure: I am Long BP and SBUX.

I highly recommend reinvesting dividends to increase the magic of compounding in your portfolio!  Never invest more than 5% of your investable income in any security.  Remember, it is ultimately your money and your decision—do your own research and invest wisely and responsibly. 

If you have questions, concerns or compliments, email me at: jewiro@comcast.net All feedback will be published!

Please note that Dr. Jeffrey Ross is not a registered financial advisor.  The advice provided is general in nature and should not be interpreted as personalized or individualized to your specific portfolio or to a specific investment.


Jeffrey W. Ross, MD is a Motley Fool investment freelancer.

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