Bitter News?
Add sugar for perspective. Plus, Trump.

by Jeff Fischer

ALEXANDRIA, VA (July 31, 1998) -- On Thursday we asked you to post answers to three questions: 1) Should the Fool cover its short position in Trump Hotels? 2) Why or why not? 3) What is the best vacation spot in the world and why?

In the past twenty-four hours our Trump message board on the Web has been one of the most active, filling rapidly with great vacation ideas. And thoughts on Trump. You now have until Monday morning, 11:59:59 a.m. Eastern Time, to post your responses to the three questions. The most Foolish post will win a free share of Coca-Cola (NYSE: KO) stock. The share will be enrolled in the company's dividend reinvestment plan for you (a $100 current value, with a future value of potentially billions -- if you add millions to it). For more background and the odds of winning, please see Thursday's column.

Though down 4% this week vs. a 1.7% loss in the S&P, the Fool Portfolio still rose to victory in the month of July. The port gained 3% while the S&P lost 1%, though it was a volatile month that we happily kiss good bye. "Good bye, July!" Stocks declined on Friday due to concerns surrounding Japan's economy and because, though inflation is very low, growth in the U.S. economy is as slow as its been in a few years. It's probably not a reason to sell out of the best performing assets in the world, though, unless your time horizon is too short to begin with.

For the week, we shared thoughts on KLA-Tencor (Nasdaq: KLAC) on Monday and covered the company's earnings on Tuesday. The next day, Bill, a guest writer, shared his thoughts on investing in America Online. On Thursday we talked Trump, as you know, as well as Lucent Technologies (NYSE: LU). Now, to end the week, today's news is somewhat bitter -- but perhaps a little milk and sugar can fix it.

Starbucks (Nasdaq: SBUX) declined 12% after announcing sales for the four weeks ended July 26 of $101 million, up 25% from the same period last year, while sales growth at locations open 13 weeks or longer (called "same-store sales") increased 2%. On average, the company expects same-store sales growth to be in the mid-single digits, or 4% to 6%. For the past 43 weeks (a more meaningful time period), same-store sales rose 6% and total revenue climbed 35%. The weaker-than-expected sales in July became the focus, though, and caused the stock to dehydrate.

The company has continuously stated that there will be monthly variations in same-store sales growth (it repeated this in its conference call last week), and all retailers face this challenge. Say you have an immovable lemonade stand. You open for business on your block. Once you're up and running for several months and everyone around the area knows about you, how do you keep sales on the rise? It isn't exactly easy. One way is to make the sun hotter. Another is to increase advertising. A third way is by offering new products. A fourth is to burn down your neighbor Sally's lemonade stand.

(The idea behind that potential lemonade stand joke was stolen from David Gardner's original and more efficiently stated joke in the book, You Have More Than You Think, page 197. Royalties will be paid.)

Anyway, there are at least two ways to look at the recent results from Starbucks: 1) Well, ouch. The company had a weaker-than-expected month. It's only four weeks, though, and a hot four weeks at that. Was the performance an anomaly? Most likely. The second way to think about this is: 2) Come next year, Starbucks has easier performance numbers to compare to. Excellent.

Number 2 is definitely the optimistic way to consider the news. Another example of this is Intel (Nasdaq: INTC). That company is having a weak year of earnings compared to last year, but that means that earnings per share growth is more likely in 1999. Yin and yang. Two sides to every coin. Bad news often becomes good news (though it can take a long time for a person to see how and why. Hey, have you read any books on Taoism? Alan Watts has a good book on the subject.)

Also, we can handle the decline in Starbucks' share price with much less concern than a Fool gives to say, an Innovex, or even an Intel. Usually the main thing that makes holding a falling stock difficult is the accompanying uncertainty and second-guessing involved (of yourself, the company, or an entire industry). Innovex could lose the current technology battle and then drift about for years. Iomega's technology might be made obsolete. Intel might continue to see eroding margins as the entire industry shifts to cheaper PCs. These uncertainties can make holding these stocks a challenge, and even more of a challenge when they're declining in price.

Starbucks is a different story. The growth is there and almost certain -- shareholders' equity and earnings per share will grow as the company expands, adding at least 1,500 new stores in the next five years and pushing into thousands of more grocery stores. We bought the stock with no price target or time horizon for selling. If we float off to heaven still holding Starbucks shares and a grandchild inherits millions because of it, so much the better. Yeah, it's "bad coffee" (that lingo is tm) to see the investment fall 25% in short order, but them's the breaks. In the scheme of life, a near-term decline is near-term meaningless. That's true of any stock once you've bought it, if -- in the long run -- you have a winner.

Finally, Starbucks has a beta of 1.39, meaning that it's 39% more volatile than the overall market. The four-year SBUX Web chart speaks volumes to this. The Wiser investors react to monthly sales numbers rather than just quarterly numbers (or, heaven forbid, just annual results!). Also, this is still a fast-growing company, and that makes for a more volatile stock with a wide range of potential valuations. Now at $42, the stock trades at 35 times the low-end 1999 earnings estimate of $1.20 per share that was given by management last week -- so it's trading at a forward multiple equal to its expected rate of growth. Starbucks now has a total market value of $3.6 billion and trades at 2.97 times sales.

One question is: would you buy the entire Starbucks franchise for the going $3.6 billion price? 1,800 locations in the U.S., U.K, and Asia, the premier name in coffee with supermarket potential that has hardly yet been tapped, as well as deals with Dreyer's and PepsiCo. Hmmm. Starbucks might be a better purchase than, a company priced at $5.5 billion. If only the Fool was adding money to the portfolio every six months, we might have looked to lower our cost basis on the Coffee Guy. After all, as that catchy jingle has gone for years, "The best part of waking up, is Starbucks in your cup."

Have a Foolish weekend...

[Corrections: Old Lou does pay a slight dividend. On Thursday I mistakenly said that Lucent didn't pay a dividend, even though I know that the company has a dividend reinvestment plan. Call me "Space Guy" when you send email my way. Also, I wrote earlier in the week that had a $36 million quarterly loss -- it was actually only $21 million. No one caught that -- or else, the bears didn't care to correct me. I did correct it the next day after suddenly jolting upright from the bar that night, thinking, "Wait... you wrote $36 million. Idiot!" I had confused the number with another. Apologies for the errors. Fool on. Oh yeah -- next week AOL reports earnings on Tuesday, August 4.]

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07/31/98 Close

Stock Change Bid ---------------- AMZN -2 3/4 110.88 AOL - 1/2 117.13 T + 11/16 60.63 DJT + 1/16 7.06 DD - 7/16 62.13 XON -1 15/16 70.13 INVX - 1/16 13.50 IP +1 44.63 IOM --- 5.25 KLAC - 3/16 29.75 LU -2 13/16 92.44 SBUX -5 9/16 41.81 COMS - 3/16 24.69 TDFX - 1/16 14.31
Day Month Year History Annualized FOOL -1.52% 3.06% 47.07% 393.56% 49.26% S&P: -1.95% -1.16% 15.48% 144.47% 25.14% NASDAQ: -2.46% -1.18% 19.23% 159.99% 27.09% Rec'd # Security In At Now Change 8/5/94 710 AmOnline 3.64 117.13 3120.87% 9/9/97 580 19.11 110.88 480.17% 5/17/95 1960 Iomega Cor 1.28 5.25 310.03% 10/1/96 84 LucentTech 23.81 92.44 288.26% 8/12/96 130 AT&T 39.58 60.63 53.18% 4/30/97 -1170*Trump* 8.47 7.06 16.61% 2/20/98 200 Exxon 64.09 70.13 9.42% 2/20/98 215 DuPont 59.83 62.13 3.83% 2/20/98 270 Int'l Pape 47.69 44.63 -6.43% 7/2/98 235 Starbucks 55.91 41.81 -25.21% 8/24/95 130 KLA-Tencor 44.71 29.75 -33.46% 1/8/98 425 3Dfx 25.67 14.31 -44.24% 8/13/96 250 3Com Corp. 46.86 24.69 -47.32% 6/26/97 325 Innovex 27.71 13.50 -51.28% Rec'd # Security In At Value Change 8/5/94 710 AmOnline 2581.87 83158.75 $80576.88 9/9/97 580 11084.24 64307.50 $53223.26 5/17/95 1960 Iomega Cor 2509.60 10290.00 $7780.40 10/1/96 84 LucentTech 1999.88 7764.75 $5764.87 8/12/96 130 AT&T 5145.11 7881.25 $2736.14 4/30/97 -1170*Trump* -9908.50 -8263.13 $1645.38 2/20/98 200 Exxon 12818.00 14025.00 $1207.00 2/20/98 215 DuPont 12864.25 13356.88 $492.63 2/20/98 270 Int'l Pape 12876.75 12048.75 -$828.00 8/24/95 130 KLA-Tencor 5812.49 3867.50 -$1944.99 7/2/98 235 Starbucks 13138.63 9825.94 -$3312.69 6/26/97 325 Innovex 9005.62 4387.50 -$4618.12 1/8/98 425 3Dfx 10908.63 6082.81 -$4825.81 8/13/96 250 3Com Corp. 11715.99 6171.88 -$5544.12 CASH $11876.47 TOTAL $246781.84

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