On CNBC’s Fast Money program last night, me and my friend Josh Brown (CEO of Ritholtz Asset Management) had a little debate on the merits of holding a prior market leader that has underperformed in what could be the last leg of the bull market. Watch here.
My mom, who is a regular viewer of the show, thought I was a bit spazzy. But this is the sort of stuff about which I get passionate. Josh is in the asset management business. He is a long only investor (meaning his firm does not short stocks). He earns his fee through tight risk management, achieved by many factors, most importantly asset allocation.
Josh and I had a brief discussion about our prior debate on Starbucks (SBUX) during the ensuing commercial break. I think it is safe to say that we both think that SBUX is a great company. But for me the waning momentum, rich valuation and underperformance at this stage of the bull market should be troubling to investors. For Josh, SBUX is a premium brand, with an amazing product, strong management and tremendous international growth prospects (and possibly domestic growth through product diversification here in the U.S), so it deserves a premium valuation. That’s obviously what makes a market.
In the past 12 months, SBUX is down about 1% vs the S&P 500 which is up 16%:
I guess the crux of my argument is pretty simple – SBUX was an amazing success story out of the depths of the financial crisis, with the stock seeing 900% gains from its lows in 2009 to its all time highs in 2013. The stock has not confirmed what seems like dozens of new highs in the broad market in the last year. Lastly, the long-term uptrend is still very much intact, which is not why I am suggesting to short the stock here. For those who feel as Josh does about the company’s prospects and the general health of the market rally, an entry back near support at $70 seems like a good entry, but I would use a break of the 5 year uptrend as a signal to get the heck out:
My final point is this – I am more in the camp that global growth is not where it should be relative to where global equity markets are at time when the U.S. Federal Reserve is all but done with stimulus. Stocks like SBUX that are expected to get a good bit of their future growth from overseas could be taking a pause for good reason, especially at a time where overseas growth could be less profitable given new found dollar strength. At a 30x P/E with expected EPS growth of 10-20%, SBUX investors are already paying a hefty price for the premium story. If the business loses some momentum for any reason, the stock could decline from both multiple contraction and a lower earnings growth rate. In other words, buying SBUX here to me implies a lot of risk, for not much reward. I’d much rather look elsewhere for a good investment opportunity.