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Starbucks Will Bounce Back, but Spending Habits Could Change

Like so many consumer cyclical stocks, Starbucks (NASDAQ:SBUX) was stung by the novel coronavirus pandemic. Like many of its peers, SBUX stock is rebounding as its stores reopen and amid hopes for a V-shaped economic recovery.

sbux stock
Source: monticello /

Off its March lows, Starbucks is up almost 56%, an advantage of more than 600 basis points over rival McDonald’s (NYSE:MCD). Investors’ faith in the world’s largest coffeehouse operator as Covid-19 rebound play isn’t necessarily misplaced. Like some other consumer-driven companies, Starbucks has a track record of dealing with crises and shocks, including the 9/11 terrorist attacks and the global financial crisis, among others.

Data confirm reopenings are significant for the java giant. As a non-essential business, Starbucks, like McDonald’s and other fast food and fast casual concepts, was mostly relegated to drive through and delivery during the worst days of the coronavirus shutdown. As its stores come back online – the company expects 90% will reopen this month – it’s recouping same-store sales.

However, reopening news is largely priced into Starbucks. What’s potentially tricky about this stock from here is that its recent price action suggests a couple things that don’t come with guarantees of materializing.

First, a 56% rally for a company of this size in just over two months implies that many of the roughly 40 million jobs shed by the U.S. economy during the pandemic will be rapidly restored. Second, the stock is acting as though consumer spending habits aren’t changing as a result of Covid-19.

SBUX Stock Not Necessarily a Sell, But …

A key benefit enjoyed by Starbucks and its investors is loyalty. A 2016 study by researchers at Cal Poly Pomona suggests the company doesn’t just have brand loyalty. It also fosters attitudinal loyalty and behavioral loyalty.

The uniqueness of the coronavirus situation could test customers’ loyalty to Starbucks. As Evercore ISI analyst David Palmer notes, Starbucks and rival Dunkin (NASDAQ:DNKN) made some missteps in the hyper-competitive breakfast arena. That’s something to consider in a post-virus world. Between all those Zoom meetings and home schooling of the kids, folks that were forced to work from home were eating breakfast at home, too.

Some probably noticed the savings they enjoyed by not eating breakfast out everyday or several times a week. Others may now permanently work from home or for an extended period of time, potentially eating into the audience for fast casual breakfast fare.

Starbucks management is promising to update investors later this month about its operational plans for a post-virus world. Perhaps the update will contain some commentary on breakfast. There’s speculation that the agenda will include Starbucks’ plans for offering curbside pickup and other customer service protocols in a world of social distancing.

Some analysts think those measures could differentiate Starbucks from competitors. At best, it’s a stretch to pin hopes for Starbucks stock on something like curbside pickup. First, watch enough TV and you’ll see plenty of fast food chains offering contact-less drive thru and social distancing measures. Additionally, curbside pickup isn’t proprietary. If it moves the needle for Starbucks, competitors that aren’t already doing so will swiftly follow suit.

Second, get enough customers picking up their orders outside of the store. That not only limits their exposure to the Starbucks experience, it caps how much money they’ll spend on each visit.

Bottom Line

There are some high points for Starbucks. Among restaurant chains, Starbucks is “tech-ier” and more innovative relative to its peers, indicating it can adapt to new trends emerging as a result of Covid-19. Plus, the company has some pricing power.

Long-term, it should be able to grow its top line and improve margins. But all of the above are longer-ranging initiatives that may not bear immediate fruit with the stock up 56% in less than 90 days.

Todd Shriber has been an InvestorPlace contributor since 2014. As of this writing, he did not hold a position in any of the aforementioned securities.

Article printed from InvestorPlace Media,

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