I think you coffee-addicted people that stand in long lines to get your fix are nuts! And, as a partial owner of Starbucks (SBUX), I love you all! Starbucks - the company - is one of the greatest corporate success stories of all time. Since opening their first Seattle store in 1971 and subsequently selling the company to Howard Schultz in 1987, Starbucks now serves millions of customers daily, has 24,000+ stores in 70 countries, employees nearly a quarter of a million people and earned $2.8 billion last year. All that and SBUX is widely recognized as one of the most socially conscious companies around. They go out of their way to treat their employees and our environment well, happily giving up large amounts of money to do so.
SBUX stock has minted buy and hold investors a fortune. If you were wise enough to purchase $10,000 worth of SBUX on August 1, 1995 your stake would now be worth $500,000 excluding dividends. This compares quite favorably versus the S&P 500. The same $10,000 investment in that index would be worth about $50,000 today.
So we know SBUX has been a fabulous investment up to this point. But what might a SBUX investment look like going forward? Can the growth continue given there is a SBUX on just about every corner in the U.S.? As a matter of fact, it looks like their overseas growth is in its early innings. On the most recent earnings call, CEO Howard Schultz made the point that there is decades of growth ahead. They are literally opening a Starbucks every 15 hours in China and the company's formal guidance is 15-20% earnings growth for the next two decades.
So, let's do the math on a potential investment in SBUX. Analysts (per Yahoo Finance) project SBUX will earn $2.10 per share this year and the stock currently trades at just over $60 per share. If SBUX compounds earnings at a 15% clip for the next 20 years, they will be earning $34 per share in 2037. By that time, their days of rapid growth will be over and something like a stock multiple of 20x each dollar of profits sounds reasonable. Their current multiple is approximately 30x each dollar earned, so we're assuming in this calculation SBUX stock will permanently lose 1/3 of it's value to multiple compression.
Give these assumptions, SBUX stock will still be worth $680 ($34 x 20) per share in 2037 excluding all the dividends you received each quarter. That's a growth rate in your stock price of 13% per year. Very good but, frankly, a far cry from the enormous 20% annualized gains over the last 21 years.
The tricky part in all this, is being able to hold on for two decades. There will be many times when SBUX doesn't grow as fast as expected for some period of time and that will cause the stock to sell-off shedding many investors. There will be multiple bear markets, corrections and recessions which will negatively impact the stock price and that, too, will cause many investors to panic, hit the sell button, never get back in and miss out on the corresponding rise in SBUX stock price as their operational results continue their upward march. But if you have the mindset of buying a piece of ownership in a great, growing company and refuse to part with your shares when the going gets tough, you usually are rewarded with great riches decades down the line.
This is the type of investment I search for at Solitude Canyon for myself and my clients. Of course, I may well be completely wrong and some new coffee megastore comes along and puts SBUX out of business in a decade. No one really knows for sure...but if spread your wealth into lots of SBUX type companies and never sell them, enough of them will be huge, life-changing winners that the handful of losers won't even matter.
Disclosures: I/We own Starbucks stock
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Amazon is arguably the most innovative company of all-time. Today, they announced they're looking to start the Amazon Pharmacy, which makes perfect sense given their outstanding logistical capabilities. Walgreens and CVS shareholders should be getting quite nervous at this news.
Even more interesting, I read about a pending new Amazon service that will serve as yet another body blow to your local mall:
Many people nowadays enjoy the convenience of shopping for clothing online but miss the ability to try clothes on as they used to do in the good old days of shopping at the mall. Have no fear—Amazon (AMZN) is going to solve your problem.
The Amazon solution is Echo Look. Amazon is sticking a camera on its Echo device (home of Alexa the voice) and it’s going to take your picture. Backed up by Amazon’s massive AI and cloud capabilities, it will make you forget you ever tried on clothes at a mall.
If nothing else, owing shares of Amazon is a solid way to hedge your portfolio against their innovation crippling the other companies in your portfolio. Their creative capabilities seems to have no bounds.
I hope they make this work, I would never bet against a visionary like Martine Rothblatt.
The stock market is not a casino. It's a place to buy ownership stakes in companies. If you think of it like that it makes it a bit easier to grasp that you're not just buying pieces of paper. For instance, Johnson & Johnson is made up of 2.7 billion shares. If you buy 100 shares of JNJ you own 100/2.7 billion of the company. As such, your portion of the $16.5 billion in profits they made last year is $785. That ownership stake also entitles you to a portion of their quarterly dividend payment. A dividend is the portion of the profits the company's management decides to share with the owners. You will receive $325 for every 100 shares of JNJ you own this year.
So, knowing that, how do we get wealthy in the stock market? It really boils down to this:
- You must concetrate your stock market purchases on high-quality companies. These are companies that constantly grow their earnings regardless of how the overall economy is performing and don't rely on an overabundance of debt.
- Once you've identified a great company you have to patiently wait to buy it at a fair price. Most of the great US companies are overvalued at the present time, in my opinion. But not all of them.
- Don't sell. Just take sell out of your vocabulary. Never sell a great company. You will almost surely end up regretting it.
- Give it time. You can take a modest sum and turn it into a massive fortune if you have enough decades to let your company's earnings compound. It often takes 25-40 years for the miracle of compounding to produce truly outstanding investment results.
There are no short cuts. You'll waste your precious time and money trying to trade your way to riches and you'll end up with nothing but regrets if you start playing with options. Just buy great companies at good prices, hold onto them for dear life and let the companies themselves do the hard work of growing their earnings. The price of the stock reflects the earnings power of the company you own.
Disclosure: Long JNJ
Running an airline is extraordinarily complex, challenging, expensive and unrewarding. I know, I used to work for an airline many years ago. We once counted the number of people doing different jobs, who met an airplane every time it landed at our hub. It was something like 20...you had gate agents, cleaners, baggage handlers, caterers, wheelchair pushers, flaggers, maintenance, fuelers and on and on it went. That makes for an extraordinarily complex business. Moreover, you have maintenance issues, weather problems, an antiquated air traffic control system, pilots/flight attendants calling in sick, irritated passengers, flight crew timing-out and over-bookings. Oh yes, the over-bookings.
The airline industry somehow thinks it's ok to sell you a ticket, take your money then not allow you to travel. It's a truly lopsided arrangement because they have all the power and it is often abused by the airline. What happened on United plays out thousands of times a day. They just ran into a passenger who, for whatever reason, said F-U to United. Then United calls in the goons and turns this into a complete PR nightmare. To somehow make matters even worse, the buffoon CEO of United says exactly the wrong thing.
I frankly think the airline industry is pretty amazing. You can fly around the world for hundreds of dollars if you wait for a good deal and go to places our ancestors couldn't have imagined. However, this mixture of greed (overselling seats), lack of competition, terrible airports, government incompetence (outdated air traffic control), TSA nonsense, thoughtless policies (capping the amount you offer to force someone to not take the flight they paid for) and indifferent employees is a devilish mixture.
If we had a true Capitalist airline industry, the airports would be privatized (as they are in Mexico, New Zealand and many parts of Asia and Europe), there would be many more seats for sale (due to more competition) and the airlines would actually have to compete on customer service and value to get your business.
Capitalism is far from the problem with the airline industry. The real problem is a mixture of government regulation that allows the Big Four airlines to provide crappy service that you and I are forced to accept, an unbelievably complex operation and government incompetence that nearly ensures our flights can't go in and out of airports smoothly and on-time.
What will come from all this? I can just about guarantee more government regulation to "help" solve the problem they helped cause in the first place. It will only make it worse.