Justin’s note: Today, I’m sharing a timely essay from Strategic Investor editor E.B. Tucker, who warns to stay away from one of today’s most controversial corporations: Starbucks. E.B. sold his shares earlier this year, and he saw the recent downfall coming a mile away.
Below, he explains how he knew the stock was in trouble… and more importantly, how you can do the same for the companies in your portfolio…
By E.B. Tucker, editor, Strategic Investor
Starbucks (SBUX) stock is tumbling.
It’s down 15% over the past 10 days. And I believe it will continue to fall from here.
The iconic coffee chain was one of the best growth stories in modern stock history. It went public in 1992 with 140 stores. Today, it has over 28,000.
But as I’ll show you in today’s essay, it looks like the growth days for Starbucks are finished.
I can’t say I didn’t see the Starbucks collapse coming…
Let me explain.
Last year, I went to the Starbucks annual shareholder meeting in Seattle.
At the time, I owned the stock personally and wanted to learn more about the company’s direction.
I knew there’d be a lot of people attending… so I arrived two and a half hours early.
It wasn’t enough.
After waiting in a line that looped around McCaw Hall, through a giant courtyard, down the side of two buildings, then doubled back on itself… I managed to get a front-row seat in the third balcony.
Capacity at McCaw Hall is 2,963, but the company had an additional overflow venue… which nearly doubled attendance.
I’ve been to other annual meetings for various companies. It’s one of the best ways to really understand the attitude of management. Seeing them talk about the company in person is invaluable. You can read their body language and truly get a feel for how they approach this role… which is of vital importance to your investment.
This meeting was totally different. It was more like a social movement or a Bernie Sanders rally. In fact, as the day wore on, I started wondering if the concept of owning equity in a profit-seeking company even mattered to the attendees.
These people attended merely to demand that the company produce a more eco-friendly cup (see the picture below, and notice the line winding behind them).
“Are you a reporter?” the lady next to me in the balcony asked. “No, absolutely not. I write an investment newsletter.”
The meaning of the job description was lost on her… but she did ask me if I thought the stock would go up.
As a side note, professionals usually ask, “What do you think about XYZ shares?” Novice shareholders usually say, “Do you think XYZ will go up?” The former tends to be better equipped for risk-taking than the latter.
I told the lady I thought the stock was off track and might correct as much as 20%. She seemed concerned, and offended. Last week, we got that correction. Instead of a buying opportunity, I think it’s a chance to get out.
Meeting company management in person and listening to them talk about their plans for the business is the best way I know of to predict its future stock price.
Howard Schultz, founder and outgoing CEO, got a standing ovation. It was his last year in the CEO role and his second time stepping down from it.
My suspicion after listening to him was that anyone taking over from Schultz didn’t stand a chance. You see, Howard Schultz is a megalomaniac. His ego is so large I could feel it on the third balcony of the auditorium. It’s impossible to run a company for the benefit of shareholders if you’re preoccupied with yourself.
When Schultz introduced Kevin Johnson, his replacement, all I could think was this guy won’t be able to turn the lights on without Schultz saying something about it.
So far it looks like my suspicion was accurate. Starbucks is a headless beast.
Incidentally, these in-person observations are important. In 2004, I went to a small shareholder meeting of an insurance firm in North Carolina with my late grandfather. The firm was about to merge with larger insurance firm Lincoln National.
The outgoing CEO was a charismatic gentleman named David Stonecipher. He was the kind of guy that made you feel like you were going to win… even when you didn’t know what the contest would be, or the rules. He just gave you that feeling.
The incoming CEO had a weak handshake. I suspected he wore his cellphone on a belt clip.
I used to think there were two kinds of corporate executives. Those who wore their cellphone on a belt clip, and those who kept the phone in their pocket. The former tended to rely on structure, models, and direct instruction. The latter made decisions based on their assessments of the real-time facts as they could perceive them. That’s who you want in charge of a company your money’s tied up in…
Because of the acquisition premium, Lincoln National later became my largest stock position. Being in my late 20s, “largest” was a relative term.
A few years later, in early September 2008, I called my grandfather. I told him something didn’t seem right in the world. My friend Cameron was Dennis Gartman’s chief analyst at the time. He told me there was an astounding open interest in Goldman Sachs October puts. This was one of several odd data points that came across my desk in the span of a few weeks. I didn’t fully understand what was going to happen… but I trusted my instinct.
My grandfather told me I’d “trade my way to the poorhouse… generating a taxable gain in the process.” I went against him. The following Monday morning I sold my stake in Lincoln National on a market order. I still have the brokerage statements documenting the trade… it was roughly $55 per share.
The following weekend Lehman Brothers went belly up… Lincoln National stock traded as low as $5 over the next eight weeks. That’s a 90% decline from my market sell order.
I bought back my whole position at an average of $9.50 per share. I used the windfall balance to buy gold at $700/oz, silver at $9/oz, a dividend-paying utility fund, and most importantly… my initial seed money to buy a portfolio of single family rental houses the following year.
Let me assure you, this trade was mostly luck. But instincts still played their part. In this case, my instinct came from attending the annual shareholder meeting, shaking the CEO’s dead fish hand, and feeling that he wouldn’t be the leader I’d want during a crisis. Attending that meeting saved me what I considered to be a fortune at the time. It also set me on a course that changed my career, and later… my whole life.
Now, I didn’t have anything this profound happen after the Starbucks meeting. But, I did learn something about Starbucks… and about our society in general.
The first order of business at Starbucks is not selling coffee. It’s an idea, a “social movement,” and a feeling. None of these will do anything to help the stock go up.
With coffee of decreasing quality as a backdrop, the company offers “safe places” for homeless people to sleep, intravenous drug users to dispose of needles and transgender persons to avoid being misidentified with the wrong pronouns. That’s what Starbucks is now.
I left that shareholder meeting predicting the stock would correct. A company this deluded can’t possibly manage to generate consistent profits.
I sold all of my shares a few months later on January 16, 2018. My call was spot on. Shares are down 16% since my sale. I think they’re heading lower.
You see, the company’s obsession with social issues is at odds with shareholder interests. Paying customers don’t want to sit next to homeless people who use the store as an air-conditioned shelter. As long as Starbucks’ leadership puts social ideals first, it’s only masquerading as a for-profit entity. If it doesn’t care about profits, it’s essentially asking stock buyers to donate in support of its true cause. That’s not how the capital markets work.
By going to the company’s shareholder meeting, I saw this months before it made headlines. I had plenty of time to sell my position at a profit and walk away.
I suspect more trouble for Starbucks in the coming quarters. If Howard Schultz tries to lean on his crumbling social justice company to elevate himself, both might collapse together.
In the meantime, I’ve found new places to invest… and better places to get coffee.
Editor, Strategic Investor
P.S. While Starbucks is quickly collapsing, there are many other places to profit in the coming quarters… opportunities that many investors are ignoring today. Right now, one of my top ideas is about cashing in on America’s third power shift.
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