The Best Retail Stock for 2007: Starbucks

Chances are that, since we began publishing our contest entries this morning, you were sipping coffee as you read. And, if so, chances are that your steaming hot cup 'o joe was made by Starbucks (NASDAQ:SBUX).

You're hardly alone. Starbucks serves hot and cold caffeinated beverages to millions of customers at more than 12,000 global locations daily. And there's no sign of that ending soon. Too many regulars, including Foolish editor Robyn Gearey, are addicted to Starbucks' sweet-smelling cafe creations.

Bring in Big Mo
But that's not enough to impress the Fools participating in our Motley Fool CAPS investor intelligence database:

Just two stars? Really? Really. Apparently, all-star investors like Rule Breakers colleague Charly Travers don't see a happy ending to this stock story. Here's how he puts it in his CAPS pitch:

"I think the company is overvalued here and that its prospects for growth are pretty thin, even counting international expansion. You can tell the company is reaching since it is straying away from the coffee business and getting into unrelated areas like music. Their beverages are also overrated. Find a good local brewer if you want a top-notch cup 'o joe."

I love Charly, but we couldn't disagree more about Starbucks. Overrated beverages? Who cares? Do you think taste has anything to do with the success of Altria (NYSE:MO)? Of course it doesn't. Cigarettes sell because they're addictive. So, too, is Starbucks' coffee.

And what of competition? Sure, Starbucks faces Peet's (NASDAQ:PEET), Green Mountain Coffee Roasters (NASDAQ:GMCR), Caribou (NASDAQ:CBOU), and every other bean-grindery on the planet. Again, I say: who cares? Starbucks is what it is exactly because of those things that Charly assailed -- the food, the chairs, the music, the Wi-Fi, and, yeah, the coffee.

Starbucks is, in short, a lifestyle. It's the safe haven for on-the-go, digitally hip, over-caffeinated professionals from Generation Y, which as recently as May 2005 numbered 77.9 million people in the U.S. with a combined buying power of $625 billion annually.

Why you should buy the numbers
But let's look at the numbers. Starbucks seems scary because it trades for 49 times trailing earnings. That's entirely justifiable. Problem is, Starbucks has traded at a premium for years, and delivered astounding returns throughout.

Rewind five years. During 2001, Starbucks traded for 49 times normalized earnings, just as it does today. Over the next five years, normalized net profit would improve by 26% annually. And the stock would soar. Those who held shares then and who, like David Gardner, were still holding at the end of 2006 enjoyed 30% average annual returns.

Today, analysts project that Starbucks will improve net income by 22% annually for the next five years. See the similarities? I'm not bold enough to call Starbucks cheap. But calling the bean giant overvalued ignores history.

Get in the game!
Starbucks is the best retail stock for 2007 because it's valued within reason, and because plenty of growth remains -- the company plans to more than triple its current global store count. At 40,000 locations, Starbucks would be bigger than McDonald's (NYSE:MCD) is today.

Bearish investors will say that's impossible. Maybe. But Starbucks has just agreed to establish a joint venture that will bring its stores to India. Meanwhile, in China, Starbucks had just 38 retail stores and 223 licensed retail locations at the end of 2006. That's roughly 260 stores serving two billion people. Anyone want to bet that Starbucks won't see significant growth in that region?

I mean that question seriously. Our quest for the best retail stock for 2007 begins and ends with you. If Starbucks is your choice, click here to rate the stock to outperform the S&P 500. Or, if you disagree with my thesis, rate the stock to underperform. (It's 100% free to participate in CAPS.)

Beginning today, our editors will be tallying your ratings for all the stocks in our contest. The one you're most bullish about will be declared the winner.

Go back to the beginning to see what other retail stocks are in the running for our CAPS contest.

Starbucks is a recommendation of the Motley Fool Stock Advisor stock-picking service. Ask for us an all-access pass and you'll get a backstage look at all of the stocks that are helping David and Tom Gardner beat the S&P 500 by more than 42% as of this writing. It's free for 30 days. All you have to lose is the prospect of a richer portfolio.

Fool contributor Tim Beyers, ranked 1,095 out more than 20,000 in CAPS, didn't own shares of any of the companies mentioned in this story at the time of publication. Get the skinny on all of Tim's stock holdings by checking his Fool profile. The Motley Fool's disclosure policy is a wake-up call for Wall Street.