Throw This Stock Away

I'm all for constructive criticism.

I don't mind dishing it out. I also don't mind taking it.

"If you have nothing nice to say about a stock," my mother would say, "go ahead and bash it. Just make sure you come back with three stocks that would be better alternatives."

OK, maybe she didn't say that, but that's still just what I did last week.

This week's throwaway? Come on down, Starbucks (Nasdaq: SBUX  ) .

Bad brews
The baron of baristas is a popular stock around Fooldom. A lot of people are cheering on CEO Howard Schultz in his prodigal return, including me. Unfortunately, it's not just a tall order to turn Starbucks around. It's a venti order.

Let's go over a few of the things working against the company right now.

  • Earnings fell during the company's most recent quarter.
  • Comps, which had always been positive during the company's heyday, have turned negative.
  • Starbucks has beaten analyst profit targets just once over the past seven quarters.
  • The company abandoned its breakfast sandwiches after they were killing the aromatic bean splendor of the shops. A good move for your nostrils, but a bad move for fans of incremental revenue.
  • Nearly every fast-food chain and convenience store is pouring premium coffee, with many of them offering drive-through convenience and all of them offering heartier fare. The competition isn't just Dunkin' Donuts and McDonald's (NYSE: MCD  ) anymore.
  • Lackluster results and years of overexpansion have the chain scaling back on the number of new stores it will open.

Believers will argue that none of these troubles are insurmountable. They will also argue that with shares having shed more than half of their value since peaking two years ago, the recent shortcomings have already been discounted.

However, analysts keep taking down their estimates as the company's prospects fade. Starbucks is now fetching a rather lofty 22 times this year's profit expectations. That's rich for a company looking to post lower earnings this year. Starbucks is also trading at a steep 19 times next year's uncertain turnaround income guesstimates.

Good news
I promised to have three alternatives for Starbucks in your portfolio. Here they are.

  • Green Mountain Coffee Roasters (Nasdaq: GMCR  ) . The bean bounces both ways, and analysts are ratcheting up this company's profit targets. Mr. Market is looking for earnings per share to soar by 48% this year and another 47% next fiscal year. No, Green Mountain isn't a cheapie -- it fetches a dear 37 times next year's projected profitability -- but this is the coffee growth stock that Starbucks investors are looking for.
  • Apple (Nasdaq: AAPL  ) . Steve Jobs' darling stock of a company is a Starbucks partner: The two hooked up to promote the unveiling of Apple's iTunes Wi-Fi Music Store last year. Free wireless connectivity may be less alluring to iPod jockeys now that Starbucks is teaming up with Apple partner AT&T (NYSE: T  ) to provide easier Wi-Fi access in its stores, but Apple is still the growth stock that Starbucks may never be again. With the iPhone's healthy monthly royalties leading the way, Apple's future is about to get even juicier.
  • XM Satellite Radio (Nasdaq: XMSR  ) . I'll be ruffling feathers with this one, but investors willing to take on heavy gobs of risk may warm up to XM. Starbucks used to have a cozy relationship with XM, when the satellite-radio provider beamed music into the coffee shops, but XM walked away from the deal back in January. XM has an uphill battle, but with an FCC decision on its pending merger with Sirius Satellite Radio (Nasdaq: SIRI  ) likely this month, and billions of dollars in synergy hanging in the balance, XM has some serious potential upside.

I'd say it's time to throw away Starbucks and invest that money elsewhere. But that's just my opinion. Fools should exercise their own due diligence before taking their last sip of this stock.

Do you like Rick's substitutions? Would you rather stick it out with Starbucks? Are there other stocks he should look at in future editions of this column? Let him have it in the comment box below.

Starbucks is a Motley Fool Inside Value recommendation. Starbucks and Apple are Motley Fool Stock Advisor picks. The Fool owns shares of Starbucks. Try any of our Foolish newsletter services free for 30 days.

Longtime Fool contributor Rick Munarriz lives within walking distance of three Starbucks stores, but he isn't much of a coffee drinker. He does not own shares in any of the stocks in this story. Rick is also part of the Rule Breakers newsletter research team, seeking out tomorrow's ultimate growth stocks a day early. The Fool has a disclosure policy.


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  • Report this Comment On June 09, 2008, at 2:43 PM, HappyEndingz wrote:

    Hey Rick,

    Went to my local Starbucks a couple of days ago, found it busy, but as I was leaving I noticed Jamba (next door) was surprisingly hopping. Maybe it was just the warm weather, people wanting cool beverages. Etc etc.

    Then I recall that the Jamba downtown location is just 2-3 doors down from a Starbucks. Hmmm.

    Do you see synergies in Starbucks aquiring Jamba? (JMBA - $2.24).

    CE

    *Fade to Black.

  • Report this Comment On June 11, 2008, at 1:20 PM, wholelottablue wrote:

    Yes, almost all of the fast food chains are offering "premium coffee" now, but none of them can provide same level of store atmosphere nor the top notch customer services.

    Starbucks is the premium coffee house, just like BMW in auto industry.

  • Report this Comment On June 17, 2008, at 6:55 AM, PvtDinky wrote:

    Sbux will be sitting at or above $35 in the next 18 months. This is because the economy is not nearly as bad as the political hucksters would have us believe. Ninety six per cent of all mortgage holders are doing great and out of the remaining four per cent most will still salvage their homes. The economies of Florida and California are already turning around which SBUXs gleans 30 % of US revenues. The World as a whole is doing pretty well. There are exceptions in the Middle East,but the rest of the picture is doing well enough one could glean a new Coca Cola ad from it.SBUX is moving in to Europe especially Germany and just beginning to go in to China.Your advice is just a smoke screen to keep the lil man from making some money while the institutions rake this one in. Oh yeah McDonalds execs are exercising their stock options like a hungry kid eating french fries and dummping Micky Dees paper as fast as possible now that it is apparent that their coffee bars will be a miserable flop.

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