Vitaliy’s Contrarian Edge

Additional Thoughts On Starbucks

I’ll be attending Berkshire Hathaway’s annual meeting this weekend. I’ll do a book signing at the Omaha Dairy Queen from 8:30-10pm on Friday May 2nd (West Dodge Dairy Queen, 404 N. 114th St.). I am very excited about attending and speaking at the Value Investing Congress on Tuesday May 6-7 at Pasadena CA. If you happen to attend one of these events, stop by and say hi.

After I wrote a piece on Starbucks (SBUX) raising questions about its future success in international expansion and questioning the growth premium built into the stock, I got a lot of great emails that really made me think (the best kind!).

About the stock: I saw a lot of value managers that I respect loading up on it, even at $5 higher. As price keeps declining, the stock is definitely becoming more interesting, however, I have not done enough research to figure at what price it turns into a buy.

I still have many questions that need to be answered, but here is a little story that really tells you about the quality of SBUX’s brand: A couple of weeks ago I guest-co-hosted a radio show in Denver. I decided to bring a gift to my co-host. It was 9am on a sunny Saturday, and coffee seemed like the right choice (for a very modest gift), plus I had an excuse to get one for myself. I stopped by a Starbucks, one of three that I encountered on my two-mile journey to the radio station. The show went well and my co-host appreciated the gesture.

Here is the thing, though. According to consumer surveys, McDonald’s (MCD) has better coffee. But I would have looked silly if brought a McDonald’s coffee instead. Some may disagree about the taste, but Starbucks went into our dictionaries as quality coffee.

For example, it’s hard to go wrong giving a Starbucks gift card, but people may look at you funny if you give them a McDonald’s gift card.

I know the issues about Starbucks – the McDonald’s entrée, the copycats, recession sensitivity, too many locations, international expansion worries. I’d have to have a better grasp on them before I buy the stock, but one thing is definitely clear to me – SBUX has a unbelievably strong brand, at least in the U.S.

After looking over readers’ feedback, I came to the following conclusion about SBUX’s international expansion: so far SBUX has succeeded in places where coffee-drinking is not deeply ingrained into the culture. In fact, the less coffee is ingrained on country’s culture the, the higher the chances of SBUX’s success.

I was amazed how many SBUX stores I saw in London. The U.K. is not a traditional coffee drinking nation – tea is the national drink. Japan falls into the same category. However, SBUX will have to climb a steep mountain in a good part of Europe (including Austria, Italy, Turkey, etc.) where coffee drinking is deeply ingrained in the culture.

Ironically, it seems that SBUX’s international success will depend on converting non-drinkers into drinkers.

Continue Reading 4 comments April 29th, 2008

Is it a Bull, Bear or Cowardly Lion Market?

I wrote a guest column for John Maudlin’s weekly newsletter.  Here are links to PDF and John’s website.  John wrote the following introduction to the article: 

Are we in a bull, a bear, or a cowardly lion market? As we will see, the answer can make a huge difference in your investment portfolio. This week I am at my Strategic Investment conference in La Jolla. About four times a year I take a break from writing the letter and bring in a guest writer. This week Thoughts from the Frontline will have the very distinguished analyst and author Vitaliy Katsenelson. 

In his recent book, Active Value Investing: Making Money in Range-Bound Markets (Wiley, 2007), he exhorted investors to fasten their seat belts and lower expectations for the next decade or so. He also provided a strategy for improving returns in this environment, what he calls range-bound or cowardly lion markets. Long-time readers will recognize some themes consistent with my own research, but Vitaliy adds some very interesting twists that I believe will make you think. In today’s letter, Vitaliy runs through his analysis of what will happen and provides an overview of how investors can make money in what will otherwise be an ocean of stagnant returns. Warning: the letter will print long, but that is because there are a lot of great charts. 

Let me also highly recommend Vitaliy’s book, Active Value Investing. I think as you read today’s letter, you will get a sense of why I am so enthusiastic about his work. You can get you copy at Amazon.com.

6 comments April 20th, 2008

Active Trader Magazine Interview

I was interviewed by Active Trader Magazine (here is a link to PDF).  What do I know about trading?  Absolutely nothing!  This is exactly what I told David Bukey, the editor of the magazine, when he asked me for an interview.  He assured me that he read my book and thought my (investing) message was very important to his readers.  How can you say no to that?  David did a great job putting the interview together, though I’ll let you be the judge. 

There is a small typo at the very end, the website I recommend (in addition to gurufocus.com) is Stockpickr.com NOT stockticker.com.

7 comments April 6th, 2008