I firmly believe in the consumer spending phenomenon known as the “New Frugal,” which is not just a shift to reduced spending, but to a different kind of spending. And as consumers come to the understanding that we’re not going to see a rapid recovery, and perhaps no recovery for some time, their focus will be on the “I need” not the “I want.” Which begs the question, “Who needs a $4 latte from Starbucks?”
And this week, Starbucks Corporation (NASDAQ: SBUX) announced that it will be raising prices on selected coffee drinks. Just what the already cashed-strapped consumer needs. So I say, “Go long Starbucks!”
Say what?!?
You heard me correctly, and I’m basing this call on three things:
1. Despite the recent hike in coffee prices, I believe they have stabilized and may slide — and this has yet to be priced into SBUX stock. Stable or falling coffee prices will greatly boost SBUX margins over time. More importantly, as coffee falls, the market will price the increase in margins and profits into the stock well before it happens.
2. During a recession, people cut back on big splurges, but they often maintain or increase the little splurges like that Caramel Macchiato or Pumpkin Spice Latte.
A long time ago, I met the man who distributed WISE potato chips in the Baltimore area. It was during a recession and I expressed concern over his business because WISE products were quite expensive compared to most competitors at the time. He smiled and told me his sales went up during a recession because workers treated themselves to the little things. And for the past two decades his wisdom has held true. Recent sales data from Starbucks validates his view, and the market has stabilized and is growing a bit.
3) Technically, the stock has broken out. SBUX sold off yesterday, but gapped higher this morning and is now back above its 50- and 200-day moving averages and looking quite strong.
SBUX is a cult stock, but while its P/E is high, it’s not out of line, at slightly less than 24 times earnings, which will expand nicely as the wholesale coffee bean market continues to cool off.
I say treat yourself to your favorite Starbucks beverage and buy the SBUX Oct 27 Calls.
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