Starbucks (SBUX) is a widely-known cultural phenomenon. Most investors know its products, clientele, and public image. The recent move by Starbucks to sell capsules for the Keurig single-serving coffee makers has spooked Green Mountain Coffee Roasters (GMCR) investors. Should investors flock to either of these two coffee companies based on their familiarity with coffee products and news stories?
No, investors should not let familiarity or news control their decisions. Don't get me wrong, I love Starbucks products. But as simple as it sounds, you are better off shopping around for better valuations instead of focusing on popular newsmakers. There are many stocks which offer comparable growth prospects. Moreover, many of them are trading at lower price multiples.
Ultimately, a stock's earnings and future cash flows determine its value. The future financial potential of a stock can be gauged by using financial metrics to determine how cheaply a stock is priced, its ability to weather hardship, and its growth potential.
As alternatives to SBUX and GMCR, consider the following stocks with strong track-records and solid credit scores:
10-Year Average ROE
Alpha & Omega Semiconductor
Semiconductor - Specialized
Aerospace/Defense Products & Services
Bridgepoint Education, Inc.
Education & Training Services
Medical Laboratories & Research
Deckers Outdoor Corp.
Textile - Apparel Footwear & Accessories
Oil & Gas Refining & Marketing
Grand Canyon Education, Inc.
Education & Training Services
Information Technology Services
Green Mountain Coffee Roasters
Processed & Packaged Goods
Like SBUX and GMCR, these alternative stocks are all categorized as "safe" according to the Altman Z-score*, which indicates that they are not considered bankruptcy risks. Moreover, the average 10-year return on equity demonstrates that these stocks have grown shareholder wealth at a respectable annual rate. It is clear from these two metrics that each of these alternative stocks is a "high" quality stock capable of weathering bad times and delivering positive long-term results.
What's more, these alternative stocks are cheaper while still providing high growth prospects:
EPS growth past 5 years
EPS growth next 5 years
Sales growth past 5 years
These alternatives beat SBUX and GMCR in value and safety, while beating SBUX on growth. Based on lower price-to-earnings ratios, price-to-sales ratios, and price-to-book ratios, these stocks are cheaper than SBUX and GMCR at current market prices. Better yet, they have excellent growth prospects which rival SBUX, though they do not match the growth trajectory expected for GMCR before its recent drop.(It is likely that analysts will lower their growth estimates for GMCR to reflect competition in Keurig-type platforms. Thus, comparing their growth prospects to outdated growth prospects for GMCR is dubious.)
I have to state for the record that I love buying a Frappuccino from Starbucks. But even though I am willing to shell out $4 for a frozen coffee drink doesn't mean that I would pay such high price multiples for coffee stocks. These valuations are too rich, even for die-hard coffee fanatics.
*Please read the article disclaimer.
Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.