The Novel Coronavirus Will Create a Huge SBUX Stock Buying Opportunity

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Consumer discretionary stocks like Starbucks (NASDAQ:SBUX) have really been struggling recently. The coffee house operator has seen its share price decimated over the past month on concerns that consumers simply won’t be buying that much Starbucks coffee so long as they’re worried about getting sick. From its February highs, SBUX stock has dropped almost 40%. Of course, it’s not alone.

The Coronavirus Will Create a Huge Buying Opportunity in SBUX Stock

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Stocks, in general, are falling off a cliff, and about as fast as they’ve ever fallen off a cliff. A month ago, the S&P 500 was up at all-time highs. The index has since fallen 25%, on escalating concerns the rapidly spreading novel coronavirus outbreak (dubbed COVID-19) will bring the global economy to a screeching halt.

But, how does COVID-19 actually impact Starbucks? How long will those impacts last? And is time to buy the dip in Starbucks stock?

The impacts of coronavirus on Starbucks are largely negative. But, perhaps not as negative as it may ostensibly seem. At the same time, the stock has fallen into dirt-cheap valuation levels, and for long term investors, starting to roll into this dip around the $60 level makes some sense.

How does Coronavirus Impact Starbucks?

Ostensibly, coronavirus creates huge headwinds for Starbucks. In many hard-hit geographies, Starbucks has already closed locations. As the virus spreads, more geographies will become high-impact areas, and Starbucks will be forced to close more stores.

Meanwhile, in geographies where the virus is spreading but not at critical levels — i.e. in the U.S. and Canada, which is where Starbucks makes most of its money — the company’s stores will likely see reduced traffic and spend as consumers increasingly stay at home.

That’s all bad news for Starbucks. But, the tiny semblance of good news is that Starbucks traffic may not get hit as bad as everyone thinks. That is, college kids and younger generations don’t seem particularly worried about this virus. They will likely keep going to Starbucks stores. Similarly, as more employees work-from-home, some of them may look to their local Starbucks as a new office with drinks, snacks, and fast Wifi.

Sure, those tailwinds are tiny compared to the huge headwinds of overall less traffic and tons of store closures. Still, the impact of coronavirus on Starbucks may not be as bad as ostensibly appears.

Is SBUX Stock a Buy?

It’s tough to say when the sell-off in Starbucks stock will be over. You will probably need the news flow regarding coronavirus to go from super negative today (Tom Hanks got coronavirus, the NBA suspended its season, Europeans can’t fly to America, etc.), to much less negative in order for the stock to stabilize and rebound.

That may not happen for a while. Expansion of testing capabilities in the U.S. will cause a surge in confirmed cases over the next few weeks, which will likely keep the news flow surrounding coronavirus negative, and keep Starbucks stock in sell-off mode.

But, we are finally starting to see a coordinated effort from both the private and public sectors to enforce social distancing and quarantining. Such measures worked in South Korea and China, where the virus has peaked and is now rapidly declining. Assuming the U.S. follows a similar trajectory, then one can expect the coronavirus crisis to abate come April or May.

At that point in time, Starbucks stock will likely rally in a big way. The stock is down 40% from its recent highs, marking the biggest correction the stock has seen since the Financial Crisis. The forward earnings multiple is essentially at decade lows, while the dividend yield is as high as it’s ever been.

The huge discount in Starbucks stock has nothing to do with the structural fundamentals. In 2019, the company reported 5% global comparable sales growth, in-line with its historical average. The discount has everything to do with coronavirus fears.

Once those fears abate, the discount in shares should fade, and the stock could rally in a big way from $60.

Bottom Line on SBUX Stock

Buying Starbucks stock amid the coronavirus outbreak might seem like a crazy move. But, a lot of bad is priced into shares today, and the bad stuff here may only last for another few weeks. As such, the contrarian investment thesis here actually makes a lot sense.

I wouldn’t be a buyer until the coronavirus news flow starts to improve. But, once it does, a golden buying opportunity may emerge out of all this turbulence.

Luke Lango is a Markets Analyst for InvestorPlace. He has been professionally analyzing stocks for several years, previously working at various hedge funds and currently running his own investment fund in San Diego. A Caltech graduate, Luke has consistently been recognized as one of the world’s top stock pickers by various other analysts and platforms, and has developed a reputation for leveraging his technology background to identify growth stocks that deliver outstanding returns. Luke is also the founder of Fantastic, a social discovery company backed by an LA-based internet venture firm. As of this writing, he did not hold a position in any of the aforementioned securities.


Article printed from InvestorPlace Media, https://investorplace.com/2020/03/coronavirus-sbux-stock-buying-opportunity/.

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