2-Star Stocks Poised to Plunge: Starbucks?

By Brian D. Pacampara | More Articles
January 20, 2011 | Comments (3)

Based on the aggregated intelligence of 165,000-plus investors participating in Motley Fool CAPS, the Fool's free investing community, specialty coffee giant Starbucks (Nasdaq: SBUX ) has received a distressing two-star ranking.

With that in mind, let's take a closer look at Starbucks' business and see what CAPS investors are saying about the stock right now.

Starbucks facts

Headquarters (Founded)	Seattle (1985)
Market Cap	$24.46 billion
Industry	Restaurants
Trailing-12-Month Revenue	$10.71 billion
Management	Founder/CEO Howard Schultz CFO Troy Alstead
Return on Equity (Average, Past 3 Years)	18.5%
Dividend Yield	1.6%
Cash/Debt	$1.45 billion / $552 million
Competitors	Green Mountain Coffee Roasters (Nasdaq: GMCR ) McDonald's (NYSE: MCD ) Peet's Coffee & Tea (Nasdaq: PEET )

Sources: Capital IQ (a division of Standard & Poor's) and Motley Fool CAPS.

On CAPS, 23% of the 7,288 members who have rated Starbucks believe the stock will underperform the S&P 500 going forward. These bears include Dijeridoo and joecourt.

Less than a month ago, Dijeridoo wrote that Starbucks "has really lost that 'trendy' vibe with which it roared onto the market." Our CAPS member concludes: "With so many locations, market saturation coupled with continuing price hikes for their beverages means that the high-water mark for the company may have already passed."

Overexpansion, coupled with intensifying competition in the specialty coffee space, continues to worry many Fools about Starbucks' prospects. In fact, Starbucks' compound annual profit growth over the past three years of 12% is substantially lower than rivals Green Mountain's 83.6%, McDonald's 27.7%, and Peet's 43.6%, as well as other restaurant stocks like Panera Bread (Nasdaq: PNRA ) at 21.5% and Chipotle Mexican Grill (NYSE: CMG ) at 37%.

CAPS member joecourt elaborates on the bear case:

They have successfully saturated the market, I swear I cannot walk 4 blocks in Chicago without running into one. But there is the problem -- they have more than enough stores. Now the prices are going up. I think while they have upper and upper middle class business they don't really have anywhere else to go. I don't see it falling apart but I don't think they have much growth left, if any.

What do you think about Starbucks, or any other stock for that matter? If you wat to retire rich, you need to protect your portfolio from any undue risk. Staying away from dangerous stocks is crucial to securing your financial future, and on Motley Fool CAPS, thousands of investors are working every day to flag them. CAPS is 100% free, so get started!

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Fool contributor Brian Pacampara owns no position in any of the companies mentioned. Starbucks and Panera are Motley Fool Stock Advisor picks, Green Mountain is a Rule Breakers recommendation, and Peet's is a Motley Fool Big Shortshort-sale selection. The Fool owns shares of Chipotle, which is a choice of both Rule Breakers and Hidden Gems.

We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Fool's disclosure policy always gets a perfect score.

Read/Post Comments (3) | Recommend This Article (7)

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 icon found on every comment.

Report this Comment On January 21, 2011, at 10:29 AM, brocheville wrote:

It may be true that prices are rising and that SBUX has little room for growth in U.S. city areas. However, these cities are already conquered by the SBUX army so why do they need growth? The demand for SBUX is not going to shift left anytime soon, and the coffee shop from Seattle will be fine. SBUX main concern is breaking into foreign markets such as India, an untapped growing economy. I am sick and tired of seeing uneducated articles bashing SBUX. How can one expect to produce an article with valid insight when they can't even use correct grammar? I don't "wat" to retire rich, thanks for the offer though.
Report this Comment On January 24, 2011, at 5:35 PM, marcfool100 wrote:

I have to agree here that this guy has missed the point. As a recent subscriber to the Fool's so-called "insider" recommendations, I read a report from MF just recently that recommended the stock! So are these people all on the same page. One recommends it, another doesn't.
Report this Comment On February 03, 2011, at 8:25 PM, nasis wrote:

@marcfool100: Note the line at the end of this (and every other) article: "We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors." I, for one, appreciate the diversity of opinion.

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