Is It Worth Buying Starbucks Stock After This Epic Run?

"Buy low, sell high." So goes the old adage for how to make money in the stock market. But what if there was another way? What if we could "Buy high, and buy higher"?

I know that sounds ridiculous, but this past week, user aryan89 posted a brilliant message on the Fool's premium boards. In it, he says:

History tells us that rather than trying to time the market and buy low, sell high, it is better to stick to your investing philosophies. If the reasons you invested into a company are still intact, rather than asking "Should I sell and take profits?", the correct question would be to ask, "Should I buy more?" 

With this in mind, as I search for five potential stocks in which to invest my money during the month of August, I'm looking for companies and stocks that are firing on all cylinders and unabashedly buying in even though a stock has had strong price appreciation.

SBUX Total Return Price Chart

SBUX Total Return Price data by YCharts.

Today, I'm investigating Starbucks (NASDAQ: SBUX  ) , which has beaten the S&P 500 by 360 percentage points over the past five years.

Why such strong performance?
To understand why Starbucks stock has continually performed so well in the past five years, it's important to understand what was happening right before this time period. Not only was this just when the Great Recession was beginning, but it was when a fundamental shift at Starbucks took place.

In many ways, this shift was an attempt to bring the company back to its roots. Founder and former CEO Howard Schultz -- who left Starbucks in 2000 -- rejoined the company in early 2008 to reinvigorate the brand.  

Schultz made it crystal clear that he thought Starbucks had lost its soul in an attempt to maximize profit. And so when he took over, the days of freewheeling expansion came to a halt, hundreds of Starbucks stores were closed, and the menu was trimmed until the company could get its core coffee products right.

Those moves, plus the intangible culture change that Schultz has brought to Starbucks, have paid off. Over the past five years, while revenue has only increased by about 6% per year (due largely to store contraction), earnings have jumped a remarkable 36% per year!

Source: Postdlf, via Wikimedia Commons.

Why buy in now?
Of course, the fact that Starbucks and its stock have performed remarkably over the past five years doesn't mean much to me if it doesn't have a bright future. But I think it does, for two key reasons.

The first is international expansion. As I pointed out in a previous article, the opportunity internationally is huge. China and India represent two markets that Starbucks is focused on (though it's making much more headway in China), and if the stores reach only a quarter of the penetration in the U.S., more than 10,000 new stores could potentially be opened.

Country

Population

Locations

Residents per Starbucks

U.S.

314 million

11,128

28,000

China

1.34 billion

700

1,920,000

India

1.24 billion

9

138,000,000

Source: Starbucks, voanews.com, World Bank. 

The second reason I believe the stock is worth looking at today is the way in which Starbucks is strategically adding on to its offerings. The acquisitions of Evolution Fresh and Teavana give Starbucks the opportunity to bring more than just coffee to the market.

Just as important, Starbucks acquired La Boulange last year to help bolster its food offerings. That's important because only one in three Starbucks customers currently leaves with food in his or her hand. It's important to remember that Schultz doesn't view Starbucks as a coffee company; he sees it as a "third place" where people gather -- the other two being home and work. It only makes sense that food would fit right in with that "third place" scheme.

Yes, Starbucks stock is pretty pricey, trading hands at 35 times earnings, but the company has stellar management, opportunity to strategically broaden its offerings, and the chance to bring its brand to Asia. To me, those are all worth the risk.

Another aspect that sets Starbucks apart from the rest is that it has become a "lifestyle brand." That means people associate Starbucks with particular values that they aspire to. The company's focus on sustainable sourcing and employee benefits helps associate the brand with a healthy, positive outlook on life. There are 3 Other Companies Ready to Rule Retail that have also become big lifestyle brands.  I personally own two of them, and they are my top two conviction holdings -- making up a combined 19% of my real-life holdings. Just click here to read more and find out who these companies are -- for free!


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