Best Stock for 2009: Starbucks

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I may be heading straight for a boiling hot cup of criticism, given the ever-increasing pessimistic buzz about Starbucks (Nasdaq: SBUX  ) , but I feel moved to nominate it as the Best Stock for 2009. In these undoubtedly tough times, there's undeniable comfort in a good cup of coffee, a high-quality experience, and a nice place to park oneself out of the house -- all on the cheap (relatively speaking). With Starbucks' shares so beaten-down right now, investors might just regret not snapping them up at such a bargain price.

A contrarian thought on the recession argument
True, we are in a recession, and that means hard times. But let's keep this in perspective. In an anecdotal aside, I was laid off when the dot-com bubble busted spectacularly, and Starbucks proved to be one of my salvations. Although I obviously didn't have much money, I had to get out of the apartment sometimes. Starbucks was a great place to grab some coffee and just relax in a nice atmosphere, or to meet up with friends to have a chat over a cuppa joe. Instead of paying much, much more for a full-blown dinner, my salvation cost me a relatively inexpensive $5 for the whole experience. That's the other side of the "pricey coffee" argument: I don't believe Starbucks is as badly positioned to survive this terrible economic environment as it's cracked up to be.

Granted, this recession is hurting Starbucks. Still, I have yet to enter an empty Starbucks, even now. I still see plenty of paying customers -- sometimes too many, it seems, when the lines are almost longer than my patience to deal with them. But with any luck, the company's cost-cutting measure of closing less-trafficked stores (which likely shouldn't have been opened in the first place) will result in a more profitable Starbucks over the long haul.

Starbucks' coffee may be known as a luxury, but I still argue it's an affordable one. We may see the death of excessive luxury as our economy deleverages, which might prove extremely difficult for ultra-fancy companies like Tiffany (NYSE: TIF  ) , Coach (NYSE: COH  ) , and Nordstrom (NYSE: JWN  ) . Things are already pretty rough for high-end restaurant companies like Ruth's Chris (Nasdaq: RUTH  ) and Cheesecake Factory (Nasdaq: CAKE  ) .

Although consumers may turn away from such indulgences, I have a feeling many more will still crave the little niceties of life, like Starbucks' coffees and their stores' pleasant and relaxing environment. Some may prefer McDonald's (NYSE: MCD  ) coffee offerings (and their low prices), but I just can't imagine grown-ups choosing McDonald's bland, fluorescent venues as a place to chat with friends, read books, or peck away at their laptops.

Starbucks has an excellent brand with its heart in all the right places, too. Whether it's offering health care for its workers, showing concern for the environment, or supporting fair-trade coffee farmers, consumers know they are frequenting a company that cares. That can be a comfort, too.

Overflowing pessimism can yield opportunity
All the gloomy Starbucks-related chatter I've heard lately makes me suspect the company's near or at the point of maximum pessimism. Let's get real, folks: The brand is not broken, and people are still going to Starbucks. When it comes to the stock's extremely low price, I'm seeing a major logic disconnect.

Starbucks shares have plunged 55% in the last year, now trading at 10 times forward earnings. That's absolutely crazy on an historical basis -- for years, this stock's average price-to-earnings ratio was around 40. At one point, it spiked to an average of about 70. Analysts still expect 17% growth over the next five years, too. Even if they're a little too optimistic, it's still easy to see that investors may have gotten a little carried away in their pessimism, judging by current multiples.

While Starbucks' growth has certainly being slammed in the short term, I believe this company's solid management and stellar brand can certainly brew up some strong growth again. Indeed, Starbucks could be one of the best investment values in a decade.

What do you think? If you believe Starbucks will be 2009's best stock, please log into Motley Fool CAPS and rate it as an outperform. We'll reveal our community's pick for the year's top stock next week.

Until then, I'm taking my venti latte with a triple shot of optimism.

Starbucks and Coach are Motley Fool Stock Advisor picks. Starbucks is also a Motley Fool Inside Value recommendation, and the Fool owns shares of Starbucks. Try any of our Foolish newsletters today, free for 30 days.

Alyce Lomax owns shares of Starbucks. The Fool has a disclosure policy.


Read/Post Comments (20) | Recommend This Article (47)

Comments from our Foolish Readers

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 December 18, 2008, at 12:54 PM, mwfair wrote:

    Personally, I only spend $1.85 at Starbucks. And a refill is only $.50. If one is out of work, its a great place to get to work, I just don't understand why the conventional wisdom is always that it takes $5 to get in the door. Not true.

  • Report this Comment On December 18, 2008, at 3:51 PM, TMFLomax wrote:

    mwfair -- you're right. I happen to be a latte addict so I feel like I always spend about $5. But you're right, it isn't always a $5 trip, depending on what you get.

  • Report this Comment On December 18, 2008, at 4:46 PM, sooterdoof wrote:

    hey mwfair - register a starbucks card and your refill is free... and TMFLomax - same to you - registere that card and free soy and syrups. i agree - anything you get at sbux that DOES cost $5 is not a drink - it's dessert. Go get a scoop of gelato or a slice of pie somewhere and what's it going to cost you?? $5. Go figure.

  • Report this Comment On December 18, 2008, at 11:47 PM, YEN4PESOS wrote:

    Optimism indeed. And, all that you say is true. However..(the dreaded "However") I think Starbucks is labled by many as a luxury that can be cut in the new age of lifestyle budgeting that will soon be sweeping the land. And yes that's coming fools. I think there overhead is to high to maintain on their rapidly diminishing revenue. Not to mention it's stigma as somewhat haughty...... Fair or unfair, many people see it as an expensive frivalty that can be pruned way back in their daily budget. Also one should consider the enormous hit they will take on the commercial real estate apocolypse that is on the horizon. No,.. The unfair stigma resulting in a loss of revenue and the upside down numbers on real property value could mean it's "Too Latte for Starbucks" Try Einsteins...............:-)

  • Report this Comment On December 19, 2008, at 10:53 AM, brodave66 wrote:

    Starbucks US same-store sales have been declining every year since FY 2004. Current corporate management has not taken the actions necessary to turn this trend around so it appears to me that overall financial performance will continue to deteriorate for the foreseeable future. Non-US same-store sales (though of relatively minor consequence) are also not currently growing.

  • Report this Comment On December 19, 2008, at 1:03 PM, jawbox wrote:

    I'd take a little more heart in this post if it was a from a Fool writer not named Alyce Lomax. She's been a bull on the 'BUX from nearly her first Foolishly paid post and owns stock the company. Her analysis/intuition may be correct, but it loses a lot of its lustre given her position and past posts.

  • Report this Comment On December 19, 2008, at 10:31 PM, brodave66 wrote:

    jawbox,

    Thanks for the heads-up on Lomax. I strongly suspected that the article was written by a die-hard SBUX apologist or stockholder.

    News (I guess that the Motley Fool is news) bias is a very bad thing.

  • Report this Comment On December 20, 2008, at 11:45 AM, miltthestilt wrote:

    I am not a fan of starbucks coffee or stock..but I wanted to comment that your book is great! I learned so much,,thank you..in researching hedge funds trading I came across a few books that I love... Hedge Fund Trading Secrets Revealed by Robert Dorfman... and Confessions of a ]Street Addict by Jim Cramer....both these books take you on a great ride about hedge funds

  • Report this Comment On December 22, 2008, at 8:54 AM, TMFMarlowe wrote:

    OK, jawbox, here's another one for you... I sold my SBUX over the summer but I like this pick and may get back in. If we're compiling anecdotal evidence, here's some more: Back during the dot-com bust, here in Massachusetts where the unemployment rate got pretty high for awhile, lots of laid-off folks (including, um, me) spent their days in SBUX with their laptops, job-hunting, taking calls, and trying to get something going. When you're used to going to an office every day and seeing people and stuff, and suddenly you don't have one, going to SBUX is an affordable emotional substitute. I don't have historical per-store sales info at hand, but more general historical results bear this out -- SBUX's revenue growth trend continued smoothly right through 2001-2003.

    PS to those throwing around the "bias" accusation: We who write for the Fool are strongly encouraged to argue our own opinions and to invest accordingly. But we do so in plain view. We are required to disclose all our stock positions on our bio pages, and if we write about a stock we hold, we disclose that at the end of the article, right there in black and white, just as Alyce did above. While you seem to be arguing that Alyce is picking this stock to enhance the value of her holdings in some way, I would argue (without having talked to her about this) that her decision to hold it -- to put her money where her mouth is, as it were -- puts some cred behind her pick.

    John Rosevear (who does not presently hold SBUX but is taking a look at it)

  • Report this Comment On December 22, 2008, at 8:58 AM, TMFMarlowe wrote:

    (Actually, looking just now, I sold my SBUX shares in October, not during the summer. Full disclosure, etc.)

  • Report this Comment On December 23, 2008, at 2:12 AM, brodave66 wrote:

    TMFMarlowe my friend - a shill is just a shill.

    Starbucks is a financial dead horse running.

    Just look at their financials. SBUX is DOA.

  • Report this Comment On December 24, 2008, at 12:44 AM, brodave66 wrote:

    "Coffee shop chain Starbucks Corp has informed employees it won't guarantee matching contributions to their 401(k) retirement plans next year, the Wall Street Journal reported Tuesday, citing a letter from the company."

    Great pick Ms. Lomax.

  • Report this Comment On December 24, 2008, at 1:14 AM, righton17 wrote:

    I don't know how anyone can drink coffee that the beans seem to have been burned to a crisp, and cost much more than most places charge.Is it that these people are trying to show us that they have money to burn? I think part of the reason sbux is loosing business is that people are starting too realise that the coffee is not that good and is way too expensive.

  • Report this Comment On December 24, 2008, at 1:52 AM, Pogue1245 wrote:

    Righton17, I believe that you are on the money. I never cared much for the coffee, or the attitude. SBUX represents the epitomic foam of "irrational exhuberance" (Greenspan was prophetic IMHO), and faces some very serious competition from other fast food enterprises. Starbucks has always relied on cache and will wither in this economy. Anyhow, "remember to write (text?) if you get work, and don't forget to hang by your thumbs."

  • Report this Comment On January 14, 2009, at 3:02 PM, caixa wrote:

    Hi, I just read your article and totally agree with you about people not wanting to scale down on some affordable luxurys (sorry not much of a speller). I am new to this game of saving money and investing. I came from a poor background and now have learned how to get out of a poverty mentalty. Anyway, my husband and I are working hard to get out of our morgage debt (only about 1 year left!) We first sensed prices inching up last year and finally decided to not eat out as much but we still enjoy going out so instead we enjoy a cup of coffee from Starbucks (I've also started to buy a few shares). At 60% off I couldn't resist. I'm a woman and I'm know a great discount. If they go down to 75%--I will buy more. I work in downtown Houston and see the Starbuck's in my building packed. Even at $5.00 --it's an affordable luxury.

  • Report this Comment On January 26, 2009, at 8:06 AM, seanoneill01 wrote:

    The "high" cost of SBUX coffee is a myth. $1.85 for a cup of coffee is not a lot to pay when its high quality coffee and comes with good feng shui, nice music, and wifi access. I think folks who say its too expensive are buying the frappes and lattes that they would pay a lot for anywhere else (that serves them).

    As for those who complain about the taste- they can't be coffee drinkers. There's no readily available comparison (wawa's nice, but not sbux).

    CHIEF COMPLAINT THAT WILL DOOM SBUX UNLESS IT WAKES UP AND SMELLS THE COFFEE: $$ for internet access. Biggest single thing they can do to get and keep folks coming is to provide free wifi- even if its only for a limited time period (15 to 30 mins).

  • Report this Comment On January 26, 2009, at 8:15 AM, petermelcher wrote:

    Frankly, even in the "best of times" I thought it was ridiculous that people would pay so much for a specialty coffee. Starbucks was a fad whose time has come and gone. Indeed, I sipped a few 'o their offerings when their shops were located across from my flight's gate and there were few other choices, but why would anyone feel paying 3 or 4 times more for a caffeine infusion would survive during hard times. You are dead wrong on this one. I believe that Starbuck's might turn up a year or two after the economy starts to recover. Meantime....take comfort in gold rather than caffeine. All that printed bailout cash will HAVE TO lead to hyper-inflation.

  • Report this Comment On January 26, 2009, at 8:52 AM, madcowmonkey wrote:

    Forget about the price of the drink. There is too much competition for SBUX to get back the market it once obtained. There are 3 coffee shops in my downtown (none of them SBUX) and they all do the same thing SBUX can. Luckily where I live, the downtowns will not let franchise players in. I think I have to drive 50+ miles to find one and there is a Wooley Bugger coffee shop below my office, so I go with a fly fishing shop.

  • Report this Comment On January 26, 2009, at 8:58 AM, cubanstockpicker wrote:

    Starbucks faces competition from every fast food store making a comparable product.

    How far can Mcd's be from making a latte?

    How about DD?

    Everyone is now making some version of (put in an adjective with a pu-ending) chinos

  • Report this Comment On January 28, 2009, at 9:21 AM, joemas wrote:

    I think you beleive your argument, but in this economy there are things you need and then there are things you may not need. 2009 is going to be a hard year for Star Bucks. Just look at the number of unemployed and you can see one reason for negative SBUX. Then the competition has heated up with other coffee houses and fast food chains, even the local gas station -Sheets- has a cappuccino / espresso / latte machine. Sorry to be contrary to your opinon, but not what I would think of for the stock of 2009. WMT or MCD would be a better choice in the retail area, but this sector is going to hurt for some time into 2010 at least....

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