Fools' First Loves: Starbucks

I made up my mind to begin investing while I was still in college, but, like many, I lacked the funds to begin investing until after graduation. Having a full-time job finally allowed me to earn enough to more than cover the beer budget. With a little bit of money in my pocket, I began slowly building a portfolio, and the first company that caught my eye was Starbucks (Nasdaq: SBUX  ) . Although our relationship has suffered some some ups and downs over the years, we've been together ever since.

Starting out
In the seven and a half years I have held shares in Starbucks, I have made just that initial purchase. That was a mistake. Like a good relationship, stocks do best when nurtured regularly -- and Starbucks did provide a few opportunities to purchase additional shares at a reasonable price. The trick is to remember that just when an investing relationship appears to be going sour and it's time to cut ties, that's likely the best time to reinvest in a superior company. But I'm getting ahead of myself.

When I first purchased shares in Starbucks, I was enamored with the company's financials. Fresh out of college with a degree in accounting, I was well aware that Starbucks carried some debt on its balance sheet, but I also knew it was able to fund most of its expansion with cash flow from operations and that the pool of profits was increasing on a regular basis. What I didn't have a firm grasp of at the time was valuation. In hindsight, this worked to my benefit for my initial purchase and against me later when I missed opportunities to add more caffeine to my portfolio.

Our relationship hasn't always been as pleasant as an afternoon meeting for espresso. There have been constant concerns that Starbucks was growing too quickly, as well as concerns that the growth was bound to slow. Those concerns remain today, even though the company continues to perform and is more than one-third of the way toward its target of 30,000 stores around the world. The company nearly caused a breakup with me when it decided that the large profits in the coffee business weren't enough and that it was time to move into online retailing -- including furniture. Ahhh, the dot-com days. It wasn't without some pain in our relationship, but Starbucks finally gave up on its Internet ventures and wrote down the investments a little more than a year later, in November 2000.

The grass isn't always greener
Of course, no relationship is perfect, and I've regularly owned other stocks behind Starbucks' back. But always under the guise of diversification. I can't be too hard on Starbucks, because I was also bitten by the Internet and technology bug and owned shares in Qualcomm (Nasdaq: QCOM  ) , Qwest Communications (NYSE: Q  ) , and even Ericsson (Nasdaq: ERICY  ) at one time or another. All of these companies taught me at least one lesson, if not more, and on a couple of occasions my lesson involved a painful loss of capital.

But perhaps the worst move was my decision to sell one-fifth of my shares of Starbucks in 2004 at a split-adjusted $22.70 a share. The way I saw it at the time, the shares were overpriced, and assuming growth slowed down even slightly, I would be looking at far less money for quite some time. I also felt I needed to date a couple of new companies that I had my eye on.

I wouldn't have been all that wrong to sell if it weren't for the tax man taking his cut. Growth did slow slightly from above the company's guidance and back into the company's long-term guided range, and investors eventually tempered their expectations a bit -- temporarily, anyway. And while the stock swooned, it hasn't yet come close to the $19.25 a share it would need to reach for me to reinvest my cash and earn the same rate of return that I have on my original investment.

Foolish final thoughts
My relationship with Starbucks has covered the usual range of emotions: the initial infatuation (when reality is often thrown out the window), the coming to grips with what the company or person is really about, and the learning to coexist and understand each other in depth. (Yes, I realize Starbucks the company doesn't know and understand me personally, but play along here, OK?)

Through the years, we've managed to get through our challenges, and I've certainly been amply rewarded -- the total return on my Starbucks shares has been a thing of beauty.

But what really matters is how much I've learned about investing simply by being Foolish and holding my shares in Starbucks. When you own a truly high-quality company, holding on for dear life can be the best long-term decision you can make. Even if that means slightly stretching the limits on how you value a company, because you know the company still has at least a few more years of growth in front of it. As I write this, I find that Starbucks' valuation is, once again, a bit higher than I feel comfortable with. But, I won't be selling my shares in this valentine again any time soon.

For more caffeine-induced Foolishness:

Take a look at the rest of today's package:

Nathan Parmeleeowns shares in Starbucks but has no financial stake in any of the other companies mentioned. The Motley Fool has an ironcladdisclosure policy.


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