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In the investing world, knowing when to buy, sell, or hold a stock can mean the difference between making money and losing money in the market. However, making the best decisions for your investments can be tricky. To minimize risk, you'll want to know all the pros and cons of a given company before deciding how to act. It's in this spirit that we'll take a closer look at Starbucks (Nasdaq: SBUX ) and evaluate whether investors should buy, sell, or hold this java giant today.
Try to think of a more recognizable coffee company than Starbucks; it's hard to do. That's because Starbucks is one of the strongest brands in the world. As the face of a multibillion-dollar industry, the coffeehouse chain is light-years ahead of rivals such as Dunkin' Donuts (Nasdaq: DNKN ) and Caribou Coffee. This is important since the strength of a company's brand directly influences its ability to command premium pricing. If you've ever purchased a latte from Starbucks, you know what I mean.
In addition to strengths in its core business, Starbucks continues to drive home sales in the consumer products sector. This includes items like ready-to-drink beverages and Starbucks ice cream. The packaged goods segment accounted for 7% of total net revenues for Starbucks in 2011 -- a growing portion of sales that could one day rival its core retail business.
The single-serve market is another potential win for Starbucks, as it stands to gain meaningful market share from Green Mountain Coffee Roasters (Nasdaq: GMCR ) . For those of you just tuning in, Green Mountain currently dominates the single-serve space thanks to its Keurig brewing system. However, key patents related to its K-Cups technology expired this month, opening the playing field for Starbucks and Dunkin' Donuts, both of which previously had licensing deals with Green Mountain.
Specifically, the launch of Starbucks' new Verismo single-cup coffee and espresso maker gives the company an official entry point into the booming $8 billion single-serve market, which is currently led by Green Mountain.
It goes without saying that Starbucks is a high-quality stock. Still, even the best companies have flaws. In Starbucks' case, the fact that it's headed in so many directions at once adds another layer of risk to the investment story. If one of these business lines was to falter, it could negatively impact the stock. Another challenge facing the coffee retailer is increased competition from restaurant brands such as McDonald's (NYSE: MCD ) and Panera Bread (Nasdaq: PNRA ) , both of which now offer frozen coffee products at lower prices.
In fact, analysts at Morningstar estimate that the cheaper price points on premium coffee beverages helped McDonald's ring in around $2 billion in coffee sales last year -- no wonder the cover of Mickey D's 2011 annual report features a woman drinking one of its McCafe java blended drinks. McDonald's now has more than 1,500 McCafe locations worldwide. As that number grows, so will the burger chain's share of the coffee market -- a threat that Starbucks shouldn't take lightly.
Starbucks has also taken a hit in recent quarters as a result of rising commodity costs. If the price of coffee continues to surge, it could depress the company's profits down the road. Still, these combined risks pale in comparison to the potential upside in the name, which is why existing shareholders may want to hold on to their stake for now.
Starbucks is the worldwide leader in specialty coffee, and thanks to the company's wide competitive moat, I suspect it will remain ahead of competitors in the years to come. Shares of Starbucks are up more than 10% year-to-date compared to a 21% gain from Panera and a 5% decline for the year from McDonald's. Looking ahead, Starbucks still has a lot to gain in terms of international growth. There may be a Starbucks on every street corner in the U.S., although many more expansion opportunities still await the company overseas.
China is an especially promising market for Starbucks. Its products are just beginning to take off in the region, where Starbucks now has 500 locations, with plans to open another 1,000 stores by 2015. All told, I believe this is a stock that investors can own for the next couple of decades.
From pricing power and international expansion to its widening economic moat, Starbucks looks like a winning investment today. To top it off, there are massive growth opportunities in the K-Cups market. Starbucks' new Verismo machine should help it gain ground on Green Mountain's turf. But that's not to say Green Mountain won't put up a fight. The Starbucks rival boasts an impressive product portfolio that continues to dominate the single-serve segment, despite recent patent expirations. The Fool's new premium research report covers all the need-to-know details of Green Mountain's investment thesis, and includes a full year of updates as changes occur. To get your copy today while it's still available, simply click here.