Probably if you are asking which stock is a good buy you should not invest in it. You should first learn how to properly evaluate any stock and then proceed with your own strategy and conviction.
Having said that lets talk about Starbucks stock. You could also read Starbucks is a bank for more in-depth financials.
The main reason people invest in stocks is to make a profit. The more the better, right?
So why would we choose Starbucks?
Let`s begin by understanding that the previous returns of a stock doesn’t forecast its future returns.
If we look at Starbucks stock price history, we will see it has done great in the last 20 years+
Why Starbucks?
If we analyze Starbucks from a business standpoint i could easily see the following:
- Great Branding and customer loyalty (In fact the strongest among fast food chains)
- Highly addictive product “Coffee” – needs to be consumed daily
- High Cash Flow business
- Operating in multiple countries
- FinTech innovation
That just to name a few.
It has overall a great moat among the coffee shop industry.
Should you buy Starbucks then?
So, it’s the perfect stock to buy right?
Well, it would be considered a Blue-chip stock, which is a well stablished strong company already past its growth phase, now in a mature phase of the business.
Well then sounds even better, right? Well, it depends.
If what you want is a “less risky” type of investment probably yes.
If what you want is a stock that can do a 500% move in 2 years, probably no
Remember what i said at the beginning? Most people invest for profits.
Also, we have to remember that some are willing to get less profit in order to feel “safer” and I say feel because even being a mature and solid company as Starbucks its price can get a 50% + drawdown at any moment in time, in fact it has happened more than once in the last decade.
The thing to consider is that the growth we see in Starbucks stock price is related to the growth in Starbucks locations over that period of years, which of course correlates to the revenue growth, which is what ultimately, we are looking as investors.
Because yes, a growth of 3,000 new locations over a base of 30,000 is a 10% growth.
But a growth of 30 locations when there were only 30 Starbucks in the world represents a 100% growth.
The same example could be said for revenue.
Yes, you may earn 100 million more this year, but if that represents a 7% increase YoY. The company earning 100 thousand representing a 85% increase YoY will in theory have a much greater stock increase too.
That is why nano – small cap stocks normally outperform biggest market cap companies. It is easier to go from 1 million to 20 million than from 200 million to 2 billion.
No Free Lunch Baby
Now again, everything is so clear, so easy. Why bother with big companies?
Let’s go all in with small high growing companies, right?
The problem with that logic is that the failure rate for those companies is normally a lot higher, they have higher credit risks, competition risks, market risks, management, etc.
If it were as easy as buying small cap companies with high growth, everyone would be already mega rich. Remember there is no free lunch in the markets.
What to do then?
There is great strategy used by many of the top investors that deal with very large pools of money, and they have a unique investor profile.
For example, when the pandemic scare just started out in March 2020, the whole market entered into a sell off, but of course certain stocks fell a lot harder than others, mainly in the restaurant / hotel business, tourism related stocks in general.
So, this kind of events and fear in the market, create opportunities where you can get the same mature, great cashflow, strong balance sheet companies for a -50% off.
It is literally a 50% discount, who doesn’t love that?
Well, if you are going shopping to the mall, everybody loves it.
If you are going into the stock market it scares the hell out of everybody.
Makes no sense but that is how markets are driven by human emotions of fear and greed.
There will be moments when markets get this irrational movements and are great opportunities to invest in some of this stocks that probably aren’t growing so fast but are getting punished by the market.
Remember also not just invest in something because is down, and you are a great investor because you are buying (i have done that mistake before). You need to first understand the business or the asset you are investing in.
Final thoughts
Starbucks is a great company, their customer loyalty, brand positioning, financials, cashflow, are great points in favor of the company.
Now if you want to do a fundamental analysis, you could look for their P/E ratio, their revenue growth rate, EPS growth. Nevertheless, markets tend to price in all that information until it doesn’t, those are the best moments to invest.
Also remember your goals, could you make money by investing in Starbucks for the next 2-5 years? You sure could!
Will it make you a millionaire or multiply your investment by 10x in the same timeframe? Probably not.
It is all about knowing your goals, knowing your investments, taming your emotions, sharpening your investment and financial knowledge. Over a period of time, all of it compounds.
Take care!
*Disclaimer: this is not financial or investment advice, this are merely thoughts on a subject meant for entertainment purposes, do your own research and consult with a professional before taking any financial or investment decisions