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Unless you've been living under a rock then you know that Starbucks (Nasdaq: SBUX ) recently announced a less-than-bold quarter. Consequently, the stock price has fallen from grace. In fact it plummeted 10% the day after earnings were announced. And after assessing the situation, I am taking advantage and rounding out my position for my real-money portfolio.
Keep it simple
In line with my investing philosophy, there are four things I look for when considering any investment:
- I want management I can trust. They need to be in it to win it, and they need to be honest.
- I want something that is understandable and that I can enjoy following.
- I want a catalyst -- a short-term event or long-term trend that will help create value.
- I want a fair price. Enough said.
Management I can trust, in it to win it
There's absolutely no question Starbucks would not be where it is today without the leadership of CEO Howard Schultz. Taking the reins back in 2008 after an extended hiatus, Schultz has been a very busy man. Need examples?
Well, there's growing the company's presence in China, establishing a presence in a new major market in India, the acquisitions of Evolution Fresh and La Boulange opening up more market opportunities -- and let's not forget the highly anticipated release of the Verismo single-serve machine this holiday season. These are all examples of his dedication to the long-term growth and sustainability of this business.
Understandable and interested
No offense, but this business is so easy to understand my kids could invest in it. In fact, they did. Yes, you heard that right. I've been working with my girls (ages 7 and 6) to learn more about investing and the doors it can open over the course of one's life. They bought their first stock not long ago. You guessed it; it was Starbucks. I asked them how the company makes its money? They said it sells coffee. I asked them to whom? They said the world. Doneski.
A long-term trend
I love companies that prompt repeat purchases. And if it's one thing coffee is good for, it's repeat purchases. Not so long ago, it was quite reasonable to believe that Starbucks was close to its saturation point. Stores were closing, and it didn't look like there was much left to tap in the way of growth.
We now know that we were wrong. Starbucks appears to be very much alive and growing thanks to bold international expansion plans to go with it branching out into new markets with Evolution Fresh and La Boulange, not to mention the Verismo and even the Tazo tea store concepts currently under consideration. If it's one thing we know, Schultz and company are not scared to try new things, and I love that. There's no question about it; Starbucks can't stand still for a moment. With competitors like Dunkin' Brands (Nasdaq: DNKN ) , McDonald's (NYSE: MCD ) and even Panera Bread (Nasdaq: PNRA ) chasing after the same customers, complacency could be fatal.
All at a fair price
Valuation is an imperfect art. To be sure, when I first added Starbucks to the portfolio, it looked pretty fairly priced at $33 and change. I even had some folks tell me it was overvalued. Was it? Possibly. But I believe that we neglected to fully take into consideration the true value of excellent management to go along with a phenomenal global brand. I'm not at all surprised to see the stock perform as well as it has. As my buddy Joe Tenebruso advised just last week, Starbucks is indeed Tier 1.
And that's what brings me back to the barista today. The recent sell-off has brought Starbucks' stock back down to just 25 times earnings -- the same multiple as when I bought it the first time. It may not be a screaming bargain, but it's a fair price for an awesome company that I plan to hold indefinitely. Feel free to join me on my discussion board where I'll take a closer look at Starbucks' valuation and potential.
Back to the grind
Starbucks is a company I truly admire. The brand conveys excellence (and coffee) and not only does it keep us coming back for more, it keeps us looking for something new. While there may still be a few headwinds to navigate, I still see a long and prosperous future for the king of coffee. So I'm taking advantage of the market's pessimism and adding to my position. Make sure to follow me on Twitter to keep up with all of my Motley recommendations.
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