Amazon, Starbucks Rose Too Far Too Fast
I came across a great Bloomberg article by John Dorfman on the meteoric rise in consumer discretionary stocks over the past several months. According to the article, consumer discretionary have increased by nearly 50% over the past three months. The author fears that they have risen too far, too fast and that the rebound in consumer spending may not be nearly as dramatic as what they have priced in.
One reason that he cites for this belief is that U.S. consumers have a ton of dent. At the end of 2008, U.S. consumer debt totaled approximately 97% of U.S. GDP. Compare that to the 23% reading that was reported when this data series started in 1952.
In the piece Dorfman singles out three companies as ones that are very expensive and might be ripe for a fall, Amazon (AMZN), Starbucks (SBUX), and Sears (SHLD).
I have learned that it is not wise to bet against Amazon so I definitely will not be shorting the company in CAPS. Unlike many consumer discretionary companies that have high valuations right now, Amazon is very well run. Management has been able to consistently grow the company in the face of terrible economic headwinds. Just look at how they successfully introduced the Kindle. Amazing. Shares of AMZN are up71% YTD. At over 50 times earnings and just under 13 times book value, this company is crazy expensive, but every time I think that it is going to stumble it just keeps in truckin'. No AMZN short for me.
The company on this short list that I have chosen to short is Starbucks. After its stock has risen nearly 60% this year, the company sells at over 28 times earnings and four times book value. That's very expensive for a company that saw its earnings drop by 18% last year and by an anticipated 1% this year.
Here's a little anecdote that describes why SBUX is going to have problems. There is an annoying woman in my office who constantly complains about not having any money, yet there she is every single morning with a giant Starbucks coffee in one hand and a giant Starbucks iced tea for the fridge in the other, day after day after day. What does two large drinks from that place cost? Let's say $8. $8 per day times 5 days per week times 50 weeks per year equals $2,000 per year that this woman is wasting on expensive coffee. Hello, we have free Keurig coffee at the office. When people get strapped for cash, this is a logical place for them to cut back.
Obviously Starbucks is facing some strong headwinds on the demand side, but they are going to face tremendous pressure on the cost side as well. The price of coffee has slipped a little bit over the past several weeks, but it is significantly higher than it was last quarter. In this sort of environment, Starbucks is not going to be able to raise prices in this sort of environment to help recoup higher commodities costs. Any increase in the price of coffee will cut directly into the company's bottom line.
There must be some Starsucks bulls out there. I'd love to hear your thoughts on the company and why you're long its stock. I promise to keep the discussion civil and be respectful, I just honestly want to know what the bull case is for this company because I don't see it.
Amazon, Starbucks, Sears Rose Too Far Too Fast