On June 28, 2018, Starbucks (NASDAQ:SBUX) hit a low of $47.37. SBUX stock then proceeded to climb to an all-time high of $99.72 on July 26, 2019, delivering a 100%-plus gain in a little over a year.
If you rode that train and didn’t sell, you’re probably kicking yourself now that it’s trading painfully close to where it was 21 months ago.
That’s okay. If you don’t have a war story to tell like this one, you haven’t been investing long enough. The best portfolio managers in the world are generally successful about 50% of the time. The key to their success is making sure that the 50% that goes up doubles the performance of the 50% that doesn’t.
Over 10 years, if you buy 10 stocks, two or three will probably flame out spectacularly, three or four will do OK, one or two will do well and if you’re lucky, you’ll be left with one stock that shoots the lights out.
Now that Starbucks is trading near the half-century mark, here’s why I believe it could be that stock.
It’s Always Darkest Before the Dawn
Yes, cliches are the worst, but I’m going to run with it just the same.
Do you remember why SBUX stock last traded below the half-century mark? I do. I wrote about it on June 6, 2018. Former CEO Howard Schultz had departed as executive chairman a couple of days earlier. Although CEO Kevin Johnson had been firmly in control of the company since April 2017, investors were freaking out.
Since Johnson’s promotion through Schultz’s departure, Starbucks lost about 17% of its value. That’s not a massive amount; however, this decline came after a couple of years going sideways. Investors were convinced Starbucks’ growth was done.
“Growth is decelerating, the opportunity in China looks tenuous, and Starbucks stock still isn’t that cheap. Indeed, Starbucks still is priced for growth — but management itself seems to be signaling that growth is at or near an end,” wrote InvestorPlace’s Vince Martin on June 26, 2018.
In fiscal 2018 (September 30 year-end), Starbucks’ Americas region had 2% same-store sales growth. It’s the lowest level of growth over the previous four years. Fast forward to fiscal 2019. The company’s same-store sales grew 5% in the Americas region, more than double what they were in 2018.
Starbucks Keeps Innovating
As for China, Starbucks announced March 12 that it was plowing $130 million into the China Innovation Park (CIP), which will include a state-of-the-art roastery, the largest of its kind outside the U.S. Expected to open in 2022, the company is doubling down on its bet on China. It plans to have 6,000 stores open by the time the roastery opens in three years.
“Starbucks has always taken a long-term view in China, and our commitment to the market has never been stronger,” said Starbucks China CEO Belinda Wong.
There’s no question that China is going to hurt Starbucks’ financials in the second quarter and through the remainder of fiscal 2020. The same holds true in the U.S. in the third and fourth quarters.
The company has said China’s same-store sales will fall by 50% in the second quarter (January-March) and for all of 2020, the region will see revenues at least $400 million shy of expectations due to the coronavirus outbreak.
However, it did say that things are getting better in China; management will be saying the same in the U.S. at some point in this fiscal year.
The Bottom Line on SBUX Stock
Earlier this year, I suggested that the success of Luckin Coffee (NASDAQ:LK) in China was great news for Starbucks shareholders because it meant the Chinese were taking to coffee in big numbers. It also said that the company wasn’t crazy to be investing so much in one specific country, albeit a densely populated one.
At the time, SBUX stock traded above $90. That enthusiasm has since vanished for obvious reasons. That said, the future still looks very bright for Starbucks.
The company doesn’t have many levers to pull right now, but I don’t know many that do. It’ll just have to ride this out.
Under $50, I’d start to think about buying SBUX stock. If it falls below $40, I’d back up the truck. It will be worth it 3-5 years from now.
Will Ashworth has written about investments full-time since 2008. Publications where he’s appeared include InvestorPlace, The Motley Fool Canada, Investopedia, Kiplinger, and several others in both the U.S. and Canada. He particularly enjoys creating model portfolios that stand the test of time. He lives in Halifax, Nova Scotia. At the time of this writing Will Ashworth did not hold a position in any of the aforementioned securities.
