1 Stock to Take Advantage of Mr. Market's Pessimism

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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:

  1. I want management I can trust. They need to be in it to win it, and they need to be honest.
  2. I want something that is understandable and that I can enjoy following.
  3. I want a catalyst -- a short-term event or long-term trend that will help create value.
  4. 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.

Starbucks is just one of several companies seeing record profits thanks to its overseas dominance. Our free report "3 American Companies Set to Dominate the World" shows you other great global leaders that deserve your attention today. Click here to get your free copy before it's gone.

Jason Moser is an analyst with Motley Fool One and Stock Advisor. He owns shares of Panera Bread and Starbucks. The Motley Fool owns shares of Starbucks, McDonald's, and Panera Bread. Motley Fool newsletter services have recommended buying shares of McDonald's, Starbucks, and Panera Bread; writing naked calls on Dunkin Brands Group; and writing covered calls on Starbucks. The Motley Fool has a disclosure policy. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. Try any of our Foolish newsletter services free for 30 days.


Read/Post Comments (4) | Recommend This Article (9)

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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 August 07, 2012, at 12:00 PM, jaynew wrote:

    Even more content now with my Grande Pike, err, my most recent additions (of more SBUX shares at $47.50 and $46 respectively, two weeks ago)! Now have 3.2% of my Port in this long-term winner and have no intention of slowing down anytime soon.

    J-Mo, here's a question for ya...other than your well-documented beliefs in the viability of the oil/energy sector, technology/innovation and, now, coffee addiction, I'm curious to know what other long-term trends you have a high (highest) degree of conviction in, for the next 10-20?

    Thanks.

    -Jaynew

  • Report this Comment On August 07, 2012, at 7:34 PM, TMFJMo wrote:

    Thanks Jaynew!

    So 10-20 year conviction? Making money baby! Haha...really though, that's a great question. Let me give it some thought and I'll drop an answer or two on the discussion board.

    Best,

    Jason

  • Report this Comment On September 17, 2012, at 12:01 PM, Cooldude0007 wrote:

    While the article mentions 3 new opportunities theres a broader picture that I am starting to see.

    There doing many new things and as he said their not afraid to try new things. I like that also.

    But the big picture adds wine and beer (with no new bricks) at some locations. Also, their adding sandwiches soon. They will be adding them also at their Target locations even though Target sells their own. Target sells their own coffee too and not much at that. Target employees run the Starbucks,it appers it's more like a franchise to Target than leasing some space. Still no new bricks,. This is really opening up a whole new market much like Micky Dees did with breakfeasts. Starbucks will soon be another lunch option and a second cup of Jo too. Panera should pay attention before their feeling S B staring down their troats, much like Kohls did to JCP. Panera seems to be having their way. This includes their high prices, again a nice opening for Starbucks. SB new cold fruit drinks are great for the lunch option and very high profit too, try one!

    There is no reason that SB cannot enter into the breakfeast arena much like Dunkin has done.

    They have other new things their trying like the green box next to Red Boxes so you can return your movie and buy your S B Jo. There are other things in the pipeline coming too. Their SSS should be going up and soon I hope. I see value here and think their future is very bright.

  • Report this Comment On September 18, 2012, at 3:23 PM, ajscores wrote:

    Starbuck announced today that starting in mid october, gold card members will no longer receive free syrup or soy in their drinks (you may laugh, but this is devasting news to someone like myself). Soy alone is a $0.60 addition in a venti, representing a 13% increase to my sugar free vanilla soy latte(SFVSL for those in the know). My question/comment is, are there any statistics on the total number of gold card members and/or the most common drink order at starbucks? It seems that a small thing like this could lead to material revenue down the line. Also of note, gold card members will receive a free drink after every 12 drinks moving forward, as opposed to the current 15. Any thousght if these two factors alone can move the needle?

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