Invest in the Next Leg of This Worldwide Movement

Invest in the Next Leg of This Worldwide Movement

5 years ago 0
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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, Disney, and McDonald’s 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 Starbucks 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 throughout 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 yrs) 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.

 

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