2 Reasons To Avoid Starbucks

With new cases of the coronavirus spiking in the US and worldwide .

With the already historic unemployment levels and job losses in recent months .

With massive uncertainty in hospitalsbanks, and other industries.

And with many Blue Chip stocks looking vulnerable when they’re supposed to be among the best areas to invest your capital.

There are few safe places to invest your capital today. And this number is growing smaller every day this crisis lasts.

The key to continue compounding your investments and build wealth is to keep investing well over time.

Most people think the number one way to do that is to invest in assets that will grow your capital over time.

And this is huge part of things.

But another huge part of this is also losing as little capital as possible.

The fewer investment losses you have the more capital you keep. And the more capital you keep the faster you can invest well to grow your wealth.

Both things are necessary to build wealth. But most only think of investing well.

Today I want to talk about the second part of things that few consider… Staying away from investments where you’ve got a high probability of losing money in.

In the last week I’ve shown you why to buy or avoid the following stocks…

Today, I want to show you 2 Reasons To Avoid Starbucks.

2 Reasons To Avoid Starbucks

  1. It’s Overvalued

As of this writing Starbucks (SBUX) is a $100 billion market cap worldwide coffee creator and seller.

And its massively overvalued…

Its P/E is 76.8.

Its P/CF is 84.2.

And its forward P/E is 31.6.

On all these metrics I look to buy investments below 20 to consider them for investment.

Starbucks is well above these numbers on average which means its overvalued by a large amount.

And this means investing in its stock today gives you no margin of safety in investing terminology.

When you invest in stocks that have a margin of safety it makes the investment safer.  And it also means you should expect to earn higher returns owning its stock in the coming years.

The inverse of this is also true…

When you invest in a stock without a margin of safety it makes the investment riskier.  And it also means you should expect to earn less owning its stock going forward.

This lack of a margin of safety is the category Starbucks falls into right now.

But why is it so overvalued?

Because during this pandemic while its stores have been closed and/or seen far lower traffic its revenue fell, which caused its profits and cash flow to fall.

When profits and cash flow fall but the stock price doesn’t fall as much… It leads to far higher valuations.  And this leads to increased risk, lower margin of safety, and lower returns you should expect to earn by owning its stock going forward.

Should Starbucks return to its “normal” profits and cash flow levels in time?  Probably.

But I don’t recommend investments on probablys and ifs…

Especially with the extreme uncertainty we’re dealing with today.

It could be another few months or another few years we’re dealing with this “new normal.”  Or we could never go back to normal as we knew it before the coronavirus ever again.

I don’t know.

What I do know is how Starbucks is performing now…

That is far below what it did in the past.  And this leads it to being massively overvalued now due to its far lower profits and cash flows. 

But there’s also something else that lowers the margin of safety for Starbucks that makes it riskier…

2. It’s Got A Lot Of Debt

As of the most recent quarter Starbucks balance sheet is made up of 129.6% of total liabilities.

In other words, after subtracting total liabilities from total assets there’s a negative number.  This means after subtracting debt from assets that the stocks equity – the shares you buy on the market – are worth less than $0.

It’s also why I can’t tell you what its debt/equity ratio is like I normally do in these articles.  Because there’s no equity left over after subtracting debt.

This is rare when you see this at an operating company.  But it’s horrible.

In terms of absolute dollar numbers, it has $25.7 billion in short term and long-term debt and capital leases.

And since 2015 its debt rose 971% from $2.4 billion to the $25.7 billion it is today.

I want to invest in safe stocks that will be around for decades to come to help me build wealth over the long term.  This helps insure I lose as little money as possible over time.

Typically, this means I invest in companies that have little to no debt compared to their cash and equity.

And in most cases I want to invest in stocks that have debt to equity ratios below 1.

Starbucks does produce large profits and cash flows in normal times which allows it to sustain and support this debt.

But we’re not living in normal times like mentioned above…

This explosion of debt in the last 5 years to fund its growth and expansion combined with the slow down in revenue, profits, and cash flows due to the coronavirus is unsustainable.

And its large debt load lowers the margin of safety even more with Starbucks stock.

None of this means I think Starbucks will crash and burn anytime soon…

I don’t.

What this does mean is that the company is in trouble over the long term if this pandemic and our past way of life doesn’t return anytime soon.  And I don’t know when things will return to any kind of normal.

For the 2 reasons above I recommend avoiding Starbucks stock.

Click the links below to see the stocks we recommend helping Depression Proof Your Portfolio.

Disclosure – Jason Rivera is a 13+ year veteran value investor who now spends much of his time helping other investors earn higher than average investment returns safely. He does not have any holdings in any securities mentioned above and the article expresses his own opinions. He has no business relationship with any company mentioned above.

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