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3 Terrible Reasons to Sell Starbucks Stock

By Demitri Kalogeropoulos – Updated Aug 8, 2017 at 11:30AM

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Why shareholders shouldn't buy into the pessimism around the coffee giant's slowing business.

This article was updated on Aug 6, 2017, and originally published on March 18, 2017.

Starbucks' (SBUX 1.17%) stock has been a dud for investors so far in 2017. It's also declined over the past 52 weeks, and so the shares have completely missed the broader market's recent 20% rally.

The pessimism likely has many shareholders considering joining the selling trend, which makes this a great time to remind yourself why you bought Starbucks in the first place. A broken investing thesis would warrant exiting your position. Just don't sell this stock because you're unhappy with its short-term price performance or out of fear that the coffee titan's growth days are over.

Coffee beans next to a cup of coffee.

Image source: Getty Images.

1. The growth story is toast

Starbucks' recent earnings results showed that the restaurant chain is not immune from the weakening industry trends that have hurt its rivals. Sales growth slowed in the fiscal first quarter, which executives described as a "very challenging period for restaurants." Then in its fiscal third quarter, Starbucks pulled back its outlook to below the 10% annual figure that anchors management's long-term plan.

Yet, by any measure, the coffee titan still has a massive runway for growth ahead.

Starbucks is planning to open an average of 2,400 restaurants per year around the globe through fiscal 2021, which marks a solid boost over last year's launch pace. Nearly one-quarter of that worldwide expansion will occur in just one market: China.

The company sees room to double its footprint in the country, and investors should be happy to see that segment take a step closer toward eventually eclipsing the U.S. in relevance to the business. After all, its latest crop of cafes in China are generating the highest sales volumes, profitability and return on investment of any class of stores in its 17-year history there.

2. There's no more money in coffee

Rising costs nearly halted the expansion in Starbucks' profit margin last quarter. In fact, operating income ticked lower in the U.S due to a tighter labor market that pushed wages higher. Help from other geographies lessened the negative impact, though. .

And we're still talking about a record-high profit margin -- one that looks even better when stacked against peers. Starbucks' 20% beats the strongest profitability that Chipotle could achieve in its best days before the food safety scare crushed its results. The coffee giant is also running not far behind the cash-printing machine that is McDonald's.

SBUX Operating Margin (TTM) Chart

SBUX Operating Margin (TTM) data by YCharts

A few of the major initiatives that could spark continued profit growth include international expansion, surging retail sales, and premium menu options. That's how Starbucks aims to boost earnings per share at a 15% to 20% pace in each of the next five years.

3. These stock returns are boring

Starbucks' 1% stock price decline over the past year places it in the bottom third of the S&P 500. Zoom out a bit, though, and that underperformance turns into a rounding error compared to the awesome returns it has generated for long-term investors. The stock beat the market over the last five and 10-year time frames while creating incredible wealth for any investor lucky enough to get in around its public offering in 1992. Buying 100 shares at that time would have set you back $1,700 for a position that's worth over $350,000 today.

SBUX Chart

SBUX data by YCharts

Starbucks isn't going to grow at anything approaching that pace over the next 25 years. But the company is still positioned to deliver market-thumping gains that should produce healthy long-term returns for shareholders who stick around.

Demitrios Kalogeropoulos owns shares of Chipotle Mexican Grill, McDonald's, and Starbucks. The Motley Fool owns shares of and recommends Chipotle Mexican Grill and Starbucks. The Motley Fool has a disclosure policy.

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