"The best stock to buy may be the one you already own." -- Peter Lynch
When I first purchased shares of Starbucks (SBUX -1.02%) in Tier 1, the real-money portfolio that I manage for the Motley Fool, I intended to hold them for years. My conviction has only grown since then. And now, much like Starbucks' beautiful green and white siren that tempts you to enjoy a delicious cup of coffee, Starbucks' current stock price is enticing me to further build out my Tier 1 portfolio's position in the coffee titan.
Tremendous global growth opportunities
Starbucks is exactly the type of investment opportunity I seek out -- a proven U.S. company with tremendous growth potential in international markets. Starbucks is still very early in its store-count expansion in high-potential markets such as China and India, both of which offer massive populations expected to consume significantly higher amounts of coffee in the years ahead.
Starbucks is also expanding its tea, juice, and bakery offerings, with these efforts aided by its Teavana, Evolution Fresh, and La Boulange acquisitions. These products should continue to boost same-store sales at Starbucks' cafes, and they also give management the option of creating new stand-alone growth initiatives such as high-end Teavana "tea bars."
Additional growth opportunities are present in the packaged goods market, where CEO Howard Schultz believes Starbucks is in the "very nascent stages of building a multibillion-dollar global consumer packaged business." Starbucks recently reached a $2.8 billion arbitration settlement with former partner Kraft to gain full control of its CPG operations, and management appears extremely excited about where they can ultimately take this business. With second-quarter CPG revenue growth of 10%, continued market share gains in the K-Cup market, and expectations of accelerating revenue growth in the quarters ahead, I believe Schultz and his team are right to be optimistic about the future of Starbucks' consumer packaged goods business.
The strategy
I want to increase Tier 1's ability to profit alongside Starbucks, but I want to do so in a more conservative manner than simply buying shares to account for the possibility of a market decline in the months ahead. To do so, I will be selling puts on Starbucks. With this option strategy, I will be paid a premium to enter a contract to buy 100 shares of Starbucks at a specified time and price. Specifically, I will be selling Starbucks January 2015 $77.50 puts, currently trading at about $5 per share. If Starbucks is trading at or above $77.50 on the Jan. 17, 2015, expiration date, the puts will expire worthless. And the $500 I receive in premium ($5 per share times 100 shares) will amount to a 6% gain on the $7,750 at risk ($77.50 per share times 100 shares).
If Starbucks is trading below $77.50, I will be obligated to purchase shares at an adjusted price of $72.50 ($77.50 strike price minus the $5 per share in premium), or about 6% lower than today's $77.50 price. I think it's also important to note that I would be buying Starbucks in January 2015, after the company will have had time to grow its earnings and cash flow. So, in effect, I would be buying shares of an outstanding business at a better valuation than is possible by simply buying shares today. And, importantly, I'd be very happy to purchase Starbucks shares at that adjusted $72.50 price.
Finally, between the time I sell the puts and the expiration date, I will have the option of buying back my puts or rolling them to other strike prices and/or expiration dates. And so, with this put-writing strategy, there will be many ways to earn a profit.
The Foolish bottom line
Nobody sells coffee like Starbucks. But the cafe titan is also increasingly expanding into tea, juice, bakery items, and even packaged goods. With massive growth opportunities in international markets still ahead as well as a booming consumer packaged goods business that's poised to take share from rivals, this growth story is far from over. And so, at least 24 hours after this article is published -- standard operating procedure for The Motley Fool's Real-Money Stock Picks program that's designed to give Fools the opportunity to buy ahead of us should they so choose -- I will be writing Jan. 17, 2015, $77.50 puts on Starbucks in the Tier 1 Portfolio.
