World's Scariest Stock: Starbucks

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When you spot this shady character strutting toward your front steps, you'll see why this is one trick-or-treater for whom you won't want to open your door. For the second year running, the scariest Halloween costume imaginable is a Starbucks (NYSE: SBUX  ) stock certificate.

Beating back some impressively stiff competition for the title from highly leveraged financial companies, including Wachovia (NYSE: WB  ) and Bank of America (NYSE: BAC  ) , Starbucks breaks the bank with a nasty combination of ghoulish past performance, spooky business contraction, and a bone-chilling outlook for consumer discretionary spending.

Nowhere to go but nowhere
Speaking of scary, have you seen the two-year chart for Starbucks lately? With the trajectory of a continental shelf giving way to the ocean's depths, the shares have jettisoned 75% of their value since late 2006. The equity markets are sufficiently frightful just now that this carnage loses some of its drama. Unlike Yamana Gold (NYSE: AUY  ) , 3M (NYSE: MMM  ) , and other quality companies that have fallen a lot just this year alone, you will not find me arguing that Starbucks has been unfairly slaughtered amid this rash of indiscriminate selling.

To the contrary, I believe much of the irrational exuberance that had been priced into this darling stock of caffeine addicts everywhere has thankfully been removed. In its wake, we find a company facing big challenges in the years ahead, including encroachment from competitors and the questionable affordability of a Frappuccino in this economic landscape.

That elusive magic touch
Not so long ago, it seemed Starbucks could do no wrong. No matter how many locations were built, nor how much they charged for a scone, caffeine junkies like me were still lining up for more. Just as the overplayed jokes about a Starbucks on every corner became more like reality, costs began to escalate, margins eroded, and price-cutting competitors such as Tim Hortons (NYSE: THI  ) and McDonald's (NYSE: MCD  ) mounted an all-out attack.

Of course, well before approaching market saturation domestically, Starbucks launched a concerted effort to globalize the brand. The prospect of having new stores open up in emerging markets and around the world no doubt lured its share of investors to the stock. On a basic level, though, the speed of this expansion effort has collided head-on with a freight train called global recession.

In fact, Newsweek's Daniel Gross recently proposed that the two phenomena were somewhat correlated. Offering a semi-serious theory that the rise of Starbucks helped feed the boom markets in housing and credit derivatives, he found that many countries with high Starbucks store counts in their financial capitals were also the most affected by the unfolding financial crisis. Now there's some food for thought you can wash down with a venti decaf mocha-latte chai.

Our frugal future
The principle source of my long-term bearish stance on Starbucks lies in the certainty that countless individual consumers will be forced to re-evaluate their discretionary spending and significantly revamp old habits, as a required adaptation to the leaner times ahead. I believe the U.S. and Europe in particular are faced with a far deeper and more protracted recession than many would think. I recommend avoiding any company that even remotely smacks of discretionary spending. Starbucks, frankly, is the most salient example I can conjure of something that people will learn to live without as their financial priorities shift.

I'm concerned that many of my fellow Fools may be sticking with Starbucks, and that either their love of the coffee -- which I fully understand -- or the "buy what you know" mantra may be unduly influencing that decision. Although the company is rated with only two stars out of five in Motley Fool CAPS, well more than 5,000 CAPS members still expect Starbucks to outperform the S&P 500 going forward. I need your help. If you haven't done so already, please sign on to the free CAPS community today, select Starbucks to underperform, and tell your fellow CAPS members why holding shares here is a mistake.

And in a week, check back, and we'll tell you whether your votes were enough for Starbucks to win the title of the World's Scariest Stock.

Further Foolishness:

Fool contributor Christopher Barker is a proud coffee addict. He can also be found blogging actively and acting Foolishly within the CAPS community under the username TMFSinchiruna. He owns shares of Yamana Gold. Tim Hortons is a Motley Fool Global Gains recommendation. Bank of America is an Income Investor selection. Starbucks is both an Inside Value pick -- as is 3M -- and a Stock Advisor recommendation, and the Fool owns shares. The Motley Fool has a jittery disclosure policy.

Read/Post Comments (12) | Recommend This Article (32)

Comments from our Foolish Readers

Help us keep this a respectfully Foolish area! This is a place for our readers to discuss, debate, and learn more about the Foolish investing topic you read about above. Help us keep it clean and safe. If you believe a comment is abusive or otherwise violates our Fool's Rules, please report it via the Report this Comment Report this Comment icon found on every comment.

  • Report this Comment On October 31, 2008, at 11:36 AM, GuamiSwami wrote: think a company like Starbucks would do what they just did in New Orleans (10,000 partners aka employees logging 54,000 volunteer hours to paint, landscape and clean-up some recovering neighborhoods), become the world's largest purchaser of Fair Trade coffee and team up with Bono and (Red) to save lives in Africa if it weren't committed to the future? We Starbuckians believe in the consumer. Consumers have power. Now if we combine consumerism with a social conscience? Look out!! What scares you may be that it is too much for you to handle. Scariest Stock today only, maybe...but let's not get ahead of ourselves, there's still a tomorrow and another one after that and so on.

    Thanks a latte and have a grande!!

  • Report this Comment On October 31, 2008, at 11:38 AM, Rustyogrady wrote:

    Just one thing to add: During times such as these, a little treat for ones self in included at Starbucks. Now go out and enjoy Halloween!

  • Report this Comment On October 31, 2008, at 2:12 PM, candersoh1208 wrote:

    Go around to the starbucks in your town. In austin the lines continue to be close to the door. I ask the store managers if they have seen any slowdown. None. I ask the 70 year old retiree, what will it take for him to drop starbucks from his daily routine. The comment I heard has been the same for soccer moms, biz folks, and the like. It would be one of the last things to go. It's an affordable luxury and for most folks, it's a huge part of their lifestyle. I invite anyone to go to their local starbucks and ask them if their business has seen much, if any, decline. I have travelled to big cities and small. I have yet to hear of anyone telling me that they are seeing a slowdown.

  • Report this Comment On October 31, 2008, at 2:46 PM, Borisbmx wrote:

    Starbucks stock has crashed 75% you missed the downside call by 2 years....

  • Report this Comment On October 31, 2008, at 3:12 PM, 728allmen wrote:

    Let's look at the facts. When you're selling 5 $20 cards for $80 in

    Cosco, That is to say for these customers that got the good deal,

    The $100 revenue you register for the daily bussiness, you only

    get $80. So, let say your margin is 20%,to simplify the argument,Your profit is nil. No wonder lately the business seems

    to be a little better. Also, don't forget all the leases they want to terminate for 600 or more closures, and those leases they don't

    want to honor for those locations they don't want to open out of 900. All that is money lost. And to scare you a little more, the international or global business receiptsts are worth a lot less now that the U.S. dollars had gone up a lot. Horward put up a good front, and suggested may be the worst is over. He wanted to perk up the stock before he has to tell you the bad news on Nov.10th.

  • Report this Comment On October 31, 2008, at 6:23 PM, FooledAndGone wrote:

    Yeah, nice. So having joined the Motley Fool Stock Advisor less than a year ago I've never heard anything but "Buy SBUX, Hold SBUX" from the newsletter--even in the face of bad news after bad news. Now your daily newsletter says "World's Scariest Stock." And I'm suposed to take you people seriously?

    You're a bunch of thieves like all the rest. Thank God (or whatever you believe in) that we'll never meet in person. You're going to get off easy since I'm only cancelling my membership. You deserve far worse--something befitting all hallows eve, to be sure. Burn in hell...

  • Report this Comment On October 31, 2008, at 8:43 PM, bunngolf wrote:

    I have never been involved in the Starbucks culture. In fact I have never even darkened their door as a customer. But, when SBUX was trading at $9 and change recently, it screamed out as a raging value play and I picked up some shares. IMO it is a great American brand in the midst of a meaningful turnaround that the former, now current CEO and founder takes seriously. It may take a while yet, but all good turnarounds do not happen overnight.

    And FooledAndGone, please, take a chill pill. It is only money and not your life. You have got to learn to take your lumps a little better in what is probably one of the worst markets in history, certainly in my lifetime.

  • Report this Comment On November 01, 2008, at 1:06 AM, dividendgrowth wrote:

    Funny that you didn't bash SBUX when it was trading at 60 times earnings 2 years ago.

    Now that it crashed 75%, you sudden feel compelled to trash it?

    Shall we say "contrarian indicator"?

  • Report this Comment On November 01, 2008, at 5:39 PM, frankhinde wrote:

    Yeah we'll add it to the other outstanding recommendations...jblu comes to mind..

  • Report this Comment On November 06, 2008, at 2:57 AM, amicidelbosco wrote:

    "Thar She Blows" says Captain Ahab. But Moby goes down for more air. Starbuck, the second mate, was too late for the harpoon this time. The problem is who knows how long and deep this whale is going to stay under water?

    The "waters" have MCafe, Timmy's and Dunkin Doughnuts who are all great sea urchins to worry about. They all have great distribution outlets, similar product lines, great coffee and BETTER PRICE structure. No wonder the "deep roaster" is having difficulty. In this environment frugality and economy is paramount. As disposable income declines high end items such as luxury lattes will become unacceptable and not so chic.

    If I were the protective Mermaid at the head mast I would advise the Captain to chart a new course! Then maybe Moby will breach the waters again. For now I can only see a whale of avoidance, that is DOWN, DOWN and DOWN. Ciao.

  • Report this Comment On November 06, 2008, at 9:15 PM, Ozcutty wrote:

    Someone forgot to tell the author that SBUX is a MF recommendation in 2 newsletters.

    So which is it?

  • Report this Comment On November 07, 2008, at 7:20 PM, Beagle2Mars wrote:

    Costa Coffee is copying Starbucks' new flavors and why? Because they can. Copyright your flavors Starbucks or devise a secret recipe (the phrase 'coca-cola' comes to mind)

    Please think about woeful starbucks price.

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