Most companies try to get you hooked on their products.
Some do it literally…
Take cigarette makers, for instance. As anyone who has tried to stop smoking can tell you, quitting can be an awful experience.
Research shows that nicotine can be just as addictive as “hard drugs,” like heroin or cocaine. Symptoms of nicotine withdrawal include irritability, headaches, insomnia, and even depression.
For cigarette makers, the addictiveness of nicotine-laden products creates a lot of repeat buyers.
As a result, companies that sell addictive products like these often make great investments.
Altria (MO) makes Marlboro cigarettes, the top-selling cigarette brand in the United States. Over the past decade, Altria’s stock has produced a return (including dividends) of more than 470%. That has far outpaced the S&P 500’s 280% return.
Alcoholic-beverage producers are another great example… Constellation Brands (STZ) distributes Corona beer in the U.S. and also owns Svedka, America’s second-most popular vodka brand. The stock is up nearly 1,500% since 2008.
Or look at companies that sell sugary and caffeinated drinks…
Monster Beverage (MNST) is a leader in the energy-drink market. Many of its popular drinks are made with sucrose or glucose (both types of sugar) and caffeine. Its stock is up about 1,100% over the past 10 years. And last week, we told you about America’s favorite chocolate maker, Hershey (HSY). Readers who followed Porter’s advice in December 2007 are enjoying gains of more than 200% so far.
Of course, some investors avoid businesses that sell products they don’t personally use or that they disapprove of… But our job isn’t to pass judgment or promote “moral” trends. Our job is to look for the best investment ideas to share with our readers.
That said, nobody who works a 9-to-5 job objects to the product sold by the company we’re looking at today.
Like Monster Beverage’s drinks, most Starbucks (Nasdaq: SBUX) products are loaded with caffeine… And its stock is up about 1,600% in the past decade.
The company has been around since 1985 and now brings in $24 billion in annual revenues. It produces more than $2 billion in free cash flow… and has almost 30,000 locations around the world where customers can get their fix. The company is also rapidly adding more international locations, especially in China.
With its ubiquitous coffee shops and iconic brand, we call Starbucks a “Global Elite” business. According to Forbes‘ ranking, Starbucks’ $16 billion brand is the 34th-most valuable in the world. The company uses its brand to generate tremendous shareholder value.
Caffeine is a part of millions of people’s daily routines. It’s not hard to see why, considering its positive side effects include increased alertness, higher energy levels, and a generally improved mood.
Plus, this “drug dealer” is conveniently located… You’ll find a Starbucks on almost every corner in urban areas. Starbucks has about 14,000 locations in the U.S. That’s roughly the same amount as McDonald’s. So Starbucks is reaching saturation in the domestic market…
With growth slowing in the U.S., you might think Starbucks’ brightest days are behind it. They aren’t. Its biggest potential market – China – is still largely untapped. Starbucks opened its first store in China in 1999. By early 2008, the company still had just 250 stores there.
But today, it has 3,400 stores in 140 Chinese cities. Its goal is to operate 6,000 stores in 230 cities across mainland China by the end of fiscal 2022. The company plans to add about 600 net new stores in the country per year.
Management believes that China can become the company’s largest market in the world. Yet, China still only represents about 20% of Starbucks’ total annual revenue. That goes to show the massive potential in the most populated country on Earth.
Despite Starbucks’ bright prospects and rapid expansion in China, its shares have dramatically underperformed the S&P 500 over the past three years. And an announcement this summer didn’t help…
Back in June, Starbucks warned that same-store sales growth was slowing. The company also announced it would close about 150 poorly performing U.S. stores in cities where many Starbucks stores already exist. That’s about triple what it typically closes per year.
Starbucks shares plummeted 9% the day after the warning. By the end of June, the stock had fallen by more than 15%. It hit $49 a share, the lowest price in more than three years.
But the market was focused on the wrong thing…
Despite slowing same-store sales growth in the U.S., international expansion has fueled top-line growth.
Overall, Starbucks’ sales growth has averaged more than 11% since 2010. The company grew revenues from China 17% last quarter.
Investors need to look at the long-term growth opportunities in the largest country in the world.
Since hitting lows at the end of June, Starbucks shares have rebounded. And with a lot of growth ahead of it – thanks to China – the company should continue to do well in the coming years.
Sometimes investing is simple.