Starbucks Stock Isn’t Among the Best Choices in the Current Environment

Like most U.S. equities, Starbucks (NASDAQ:SBUX) stock is likely to rebound over the next few months as the nation’s economy starts to recover from the global health crisis. But SBUX stock has important negative catalysts that will keep it from jumping as much as many other names in the medium term.

Starbucks Stock Isn't Among the Best Choices in the Current Environment
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So far, the coffee purveyor’s shares have matched other consumer names in the declines of the past month, down 21%, versus the near-20% decrease for the Consumer Discretionary Select Sector SPDR Fund (NYSEArca:XLY). Starbucks is the exchange-traded fund’s fifth-biggest holding in a 65-stock portfolio.

Investors who plan to hold Starbucks stock for more than a few weeks but less than a year (when strong fears about the coronavirus are likely to be largely gone) should avoid the coffee retailer’s shares.

Small Stores, Reliant on Socializing

In the U.S. and likely in other countries, Starbucks has important disadvantages in the current environment, even compared to other restaurants. Specifically, most of Starbucks’ stores are much smaller than the average restaurant. As a result, groups of people have to sit pretty close to each other in the company’s stores.

Within a couple of weeks, restaurants will likely be allowed to reopen in many locations, but strong fears of the coronavirus will probably persist. In that situation, people will feel more comfortable drinking coffee in the morning at, say, a McDonald’s (NYSE:MCD) restaurant. That’s because, at most McDonald’s restaurants, customers can much more easily stay six feet away from other patrons than in Starbucks’ stores.

Secondly, historically many people go to Starbucks in order to socialize with other people for long periods of time. For at least the next 12 months, many consumers will feel that socializing indoors at one location for long periods of time is dangerous.

It’s true that many people will be happy to order their Starbucks coffee from the company’s drive-through windows. so these negative catalysts aren’t going to completely crush the company’s results. Still, I believe that Starbucks’ sales will drop more than those of many restaurant chains over the next three to six months. And popular retailers, like Walmart (NYSE:WMT), Target (NYSE:TGT), and TJX (NYSE:TJX), will also probably report stronger comparative sales than Starbucks during this period.

Increased Competition in China

Speaking on CNBC on March 24, Starbucks CEO Kevin Johnson said that the company was benefiting from an “uptick” in China as that country continue to recover from the coronavirus epidemic. But Starbucks is also facing a strong, new competitor there in the form of Luckin Coffee (NASDAQ:LK), a China-based coffee retailer that’s growing extremely rapidly.

In fact, Luckin, whose product revenue surged an incredible 557% year-over-year in the third quarter, already has more stores in the country than Starbucks. Moreover, as I’ve pointed out in the past, Luckin’s business model is very well-suited to coping with the coronavirus outbreak.

Bottom Line on SBUX Stock

Over the next one to six months, Starbucks’ stock is likely to climb meaningfully. But the company’s stores and its reliance on prolonged socialization are likely to keep a lid on its financial results and its shares.

Meanwhile, it’s facing tough, new competition in China. Consequently, investors should sell Starbucks and buy stocks that are better positioned to outperform the market going forward instead.

As of this writing, Larry Ramer owned shares of Luckin stock. Larry Ramer has conducted research and written articles on U.S. stocks for 13 years. He has been employed by The Fly and Israel’s largest business newspaper, Globes. Larry began writing columns for InvestorPlace in 2015. Among his highly successful, contrarian picks have been GE, solar stocks, and Snap. You can reach him on StockTwits at @larryramer.

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