Let’s not mince words. Starbucks Corporation (NASDAQ:SBUX) is a great American success story, and so is SBUX stock. However, Starbucks is entering a new era.
It’s worth examining what has happened thus far with the company to understand why SBUX stock is likely about to cool off in the near-term, but still looks great for the long-term.
After all, it’s the long-term that ultimately matters, and that’s what my forthcoming stock advisory newsletter, The Liberty Portfolio, focuses on.
The Starbucks Story
The reason Starbucks found success was not because it served coffee. It’s because it created a location between work and home where people could meet. There wasn’t any obvious location for such a thing until SBUX came around.
Think about it. When you need to meet with someone, what’s the easiest thing that comes to mind? If you are in any urban area, Starbucks as a meeting location is probably one of the top three things to hit you.
Of course, Starbucks also sold an addictive product, which didn’t hurt.
It could have stopped there, but it didn’t. It moved its coffee into grocery stores. It made ice cream. In its own stores, it added ice blended drinks, flavored coffees, teas and juices (via acquisition), snack food boxes and eventually pastries. Then it moved into breakfast offerings to compete with the fast-food chains.
And SBUX stock did very well amidst all this expansion.
However, operationally speaking, things have started to slow down a bit. The recent run in shares is belying this fact.
SBUX is hardly in trouble — it’s just starting to plateau as it reaches a zillion stores around the globe. It’s not that the concept or the stores are getting tired and old, like McDonald’s Corporation (NYSE:MCD). It’s not that there’s no growth — it’s just that growth isn’t what it was. The numbers just suggest that it’s time for a reboot.
CEO Howard Schultz kicked himself upstairs to Executive Chairman, where he will be developing the Starbucks Reserve Roasteries, expand the Reserve retails stores, and more ominously for this investor, “social impact initiatives.”
What does this mean?
The COO might need a little time to get adjusted. The Chief Operating Officer knows how to operate the business, not innovate. He’s there to keep tight watch on the company and make sure it continues to execute, make money, generate cash flow and not flail.
There’s probably some growth to be squeezed here and there, but for the most part, the COO moving to CEO smells like SBUX is going to cool off from its current burst.
Still, there’s the long-term to think about.
Bottom Line on SBUX Stock
While Starbucks is currently trying to make a run on its 2015 highs around $63, I think shares are about to stall out. I doubt it will go much higher in the near-term so even selling some covered calls several months out may squeeze more upside out of your long position than just holding it.
But don’t sell Starbucks stock if you own it.
Starbucks 3.0 is going to do very, very well. See, Schultz isn’t an operator so much as an innovator. He has done very well when it comes to innovation. When he emerges with his concepts and they start rolling it out, that’s when Starbucks may re-enter its growth phase.
Right now, though, SBUX stock trades at nearly 30 times net income. While analysts see 15% annualized growth over the next five years, and Starbucks deserves a premium for its cash flow and brand name, I think 30x is too expensive given the phase it’s about to enter. So I wouldn’t buy the stock here.
But I think the stock market as a whole is overvalued, and believe a true correction is coming. If it does, SBUX will take a haircut. Ideally, something around 20% to 30% would make things a whole lot more interesting for true value buyers.
Lawrence Meyers is the CEO of PDL Capital, a specialty lender focusing on consumer finance. He has 20 years’ experience in the stock market, and has written more than 1,600 articles on investing. He also is the Manager of the forthcoming Liberty Portfolio. Lawrence Meyers can be reached at TheLibertyPortfolio@gmail.com. As of this writing, he did not hold a position in any of the aforementioned securities.