Is Red-Hot Starbucks Corporation (NASDAQ:SBUX) Still a Buy?
Despite the volatile stock market, Starbucks Corporation (NASDAQ:SBUX) continues to defy the broader markets and soar higher, up 52% year-to-date and 65% year-over-year. But in an overvalued stock market, is Starbucks still a buy?
The broader stock markets traded near record highs between May and July, defying the ‘sell in May and go away’ mantra. And the markets have, for the most part, recovered from August’s Black Monday. In fact, the S&P 500 is actually in positive territory this year; half a percentage point, but when you look back at 2015, that’s still pretty incredible.
The Halloween Indicator is the bookend to the ‘sell in May and go away’ adage. Where stocks typically provide mediocre returns between May Day and Halloween, they tend to do better from October 31st and the following May 1st.
With just a week until we hit October 31st, will Starbucks ride the Halloween indicator higher? Or should investors be a little afraid of the company’s long-term, bullish trend?
Frothy Starbucks Stock Justifiably Caffeinated?
At roughly $62.00, Starbucks’ share price is up an astonishing 52% so far this year. When you look at the underwhelming returns many restaurant stocks or specialty eateries are putting up, the Starbucks outlook remains encouraging.
In the third quarter, the company reported record quarter revenue and record earnings per share. Third-quarter revenue was up 18% year-over-year at $4.9 billion. While net income increased 22.2% to $626.7 million or $0.41 per share, versus $512.6 million or $0.34 per share in the same prior-year period. (Source: “Starbucks Delivers Record Quarterly Revenue of $4.9 Billion and Record Q3 EPS,” Starbucks.com, July 23, 2015.)
During the quarter, the company opened 431 net new stores, bringing its global empire to 22,519 stores. Despite it feeling like there is a Starbucks on every corner, the company continues to attract more and more customers. Year-over-year comparable store transactions increased by roughly 18 million in the U.S. alone and over 23 million globally.
How can the company continue to expand and keep up this pace when the ubiquitous green mermaid is already watching us everywhere we go? The company recently completed the acquisition of Starbucks Coffee Japan, Ltd., giving it a stronger presence in the second-largest market when measured by retail store sales. It will also allow it to expand its presence in this growing market.
The company recently announced a licensing agreement with Casino Restauration that will open Starbucks stores within Géant Casino Hypermarkets and Casino Supermarkets across France. It also inked a licensing partnership with Taste Holdings to open Starbucks stores across South Africa, starting with Johannesburg which is expected to open in 2016. This will be Starbucks’ first store in Sub-Saharan Africa.
While unconfirmed by Starbucks, word on the street is that the company is in talks to open branches in Italy—a country that knows a thing or two about coffee and boasts the seventh-highest per capita coffee consumption in Europe. The deal is expected to be signed by Christmas. (Source: “Percassi verso l’accordo per portare Starbucks in Italia,” corriere.it, October 15, 2015.)
The company has a market cap of $92.4 billion and forward P/E of 33.0. While the price to earnings ratio seems high, it’s accompanied by impressive financial results as well as a strong outlook. This suggests Starbucks continues to offer investors tremendous long-term growth opportunities.
Halloween Indicator to Send Starbucks Higher?
The best period in stocks is about to begin. And I think a robust company like Starbucks will be able to ride the bullish sentiment higher; especially on the heels of the strong momentum from the S&P 500, Dow Jones Industrial Average, and NASDAQ.
That’s because studies show that the Halloween effect is more pronounced when the stock market is able to buck the downward trend of last two months of the summer period (September to October).
Case in point: going back to the late 1800s, when the Dow Jones was a loser during the two months before Halloween, it posted an average Halloween to May Day gain of four percent. When the two months prior to Halloween were positive, the Dow’s Halloween through May Day gain was 6.8%. (Source: “The best six months for stocks is about to begin,” marketwatch.com, October 23, 2015.)
Yes, I know; correlation is not causation. But when you see underperforming stocks doing well, the six-month Halloween Indicator looks more than a little encouraging for specialty eateries like Starbucks that are actually posting some really excellent numbers.
Speaking of which, Starbucks releases its fourth-quarter and fiscal year 2015 results after the market close on Thursday, October 29, 2015.