Book Review, Part I: Finding the Next Starbucks - A Valuable Read

by: Chad Brand

I just crossed another book off of my Amazon Wish List: "Finding the Next Starbucks: How to Identify and Invest in the Hot Stocks of Tomorrow" by Michael Moe, founder and CEO of ThinkEquity Partners.

At first I was leery of the book simply because of the title. In my opinion, many investors obsess over finding the next Microsoft or Google, when in reality, the odds of doing so are close to zero. The end result is people getting caught up in "story stocks" without any regard for the stock's valuation relative to what a reasonable growth assumption would be.

The most recent example of this was Sirius Satellite Radio (NASDAQ:SIRI). For months, it was the stock I got more questions about than any other. I wrote about it several times back in 2004 and 2005, explaining how the shares were trading at levels that couldn't be justified with any degree of confidence as far as future financial projections were concerned.

Finding the Next Starbucks

Still, you could tell many people really thought Sirius could be the best performing stock of the next decade and they just had to own it. The single digit price tag fueled the urge even more, as they thought the stock was so cheap. Well, today Sirius stock fetches a mere $2.77 a share (down about 70% in less than three years) and is fighting to merge with its only competitor in order to stay afloat. Sirius and XM Satellite Radio Holdings (XMSR) were worth more than $20 billion combined back then. Today, that figure stands at just a little over $7 billion.

Despite my initial skepticism, Michael Moe really never started to lead readers down the path that usually results in buying Sirius at 9 bucks. As a result, I was pleasantly surprised by the book because it was able to focus on growth investing but did not ignore the valuation component. Too often, people assume that if a company grows fast enough, they will make a killing regardless of the price they pay. The book outlines some very good lessons to follow when investing in growth companies, and although I didn't agree with everything contained in the 300 plus pages, Finding the Next Starbucks is definitely worth a read.

Stay tuned for a future post with further comments on "Finding the Next Starbucks."