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Starbucks ($SBUX) - A good lesson on market expectations
Starbucks dropped over 9% today as the market digested its excellent Q2 Fiscal 2023 results. Yes, you read that right folks. Stock price takes a bath after quarterly results had comp metrics that were pretty much excellent across the board. Earnings per share beat expected estimates by 13% , revenue increased 14%, same store sales were excellent in North America and international.

Starbucks investor relations website highlights the following quote:
"I am so proud of our outstanding second quarter performance, underscoring strength in both topline and margin globally. This momentum was made possible by the investments we are making in our stores and partners, and allowed us to continue unlocking capital to further reinvest in our business"
Rachel Ruggeri, Chief Financial Officer

And the market reaction? A good old fashioned stock price shellacking:
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This was a strong move to the downside on high trading volume. The stock gapped down at the open and it became a southwards journey all day.

This is a reminder that the market not only asks "what have to done for me lately?", it's also asks "what are you going to do for me tomorrow?". The fall was supposedly due to Starbucks management only REAFFIRMING full year guidance. The "market" wanted management to RAISE full year guidance. Investors are a demanding bunch.

This is what can happen to a stock doing really well and has become richly valued compared to the broad market (multiples are about 1.5 times the market). The smallest of disappointment can be met wth heavy selling. Hence the cliche "buy the rumour, sell the fact" (it's what we say in Australia, I think the Americans. say "buy the rumour, sell the news").

This is why short-term market timing using technicals, fundamentals or a combination of both is so difficult. Not only do you have to contend with daily market noise (Brownian motion), you're also trying to gauge collective market expectations and sentiment. Stocks don't trade on current fundamentals. They trade on future expectations. Prices will rise and fall depending on whether those expectations are met, exceeded or missed. And since it's difficult to gauge exactly what that collective expectation is, your short-term bets are only a probabilistic wager at most.

As retail investors, our best strategy is to hop on board the secular business trends and downplay any short-term market noise. Get on board the big multi-year trends, sit back and enjoy the ride. Buy excellent businesses who have a clear growth runway. Get them at a bargain if you can, but if your timeframe is long enough, you only need to buy them at fair value ... you can even buy them when they're a little more expensive than fair value. Long timeframes give you a lot of leeway. Just know that market prices are never about today, they're always about tomorrow.

We love Starbucks as a business and we're long-time owners of the stock. Yeah, we hate their weak "coffee-flavoured hot water" they pass off as real coffee. But apparently lots of other people love it based on the numbers and that's all that really matters.

Conor Mac's avatar
Conor Mac
@investmenttalkMay 4
Nailed it, as per.
Jazzi Young's avatar
Jazzi Young
@jazziyoungMay 4Author
@investmenttalk Thank you Conor !
Joey Hirendernath's avatar
Joey Hirendernath
@joeyhirendernathMay 4
Amazing analysis as always!

"Buy excellent businesses who have a clear growth runway. Get them at a bargain if you can, but if your timeframe is long enough, you only need to buy them at fair value"

It's a simple strategy but one so many people overlook in favor of the complex.
Jazzi Young's avatar
Jazzi Young
@jazziyoungMay 4Author
@joeyhirendernath Thank you Joey ! This is a huge compliment because this post was written fluidly off the top of my head. I wanted to get my thoughts written down while it was still fresh in my mind. I had just logged into my Schwab account and saw Starbucks was my biggest loser for the day !
Thoughtful Investing's avatar
Thoughtful Investing
@fi_investorMay 4
Wonderful analysis Jazzi! Very informative
Jazzi Young's avatar
Jazzi Young
@jazziyoungMay 4Author
@fi_investor Thank you !
Joshua Simka's avatar
Joshua Simka
@tomatoMay 5
The market may be a "voting machine" in the short term, but the nice thing about a company like $SBUX is it pays that nice dividend while we stick around for the long term. I thought it was a great quarter! Cheers! ☕
Rihard Jarc's avatar
Rihard Jarc
@rihardjarcMay 5
Expectations are everything in the market on the short-term.
Pearl Gray Equity and Research's avatar
Pearl Gray Equity and Research
@pgerMay 5
The stock slumped due to the guidance, the earnings guidance is what is priced after earnings. Basically what happens with institutional portfolio managers, you will have an algorithm set on benchmark guidance and you will reduce size if guidance is lower. Most institutional PMs gather and trade with AI.
Nathan Worden's avatar
Nathan Worden
@nathanwordenMay 5
Frame it: "Stocks don't trade on current fundamentals. They trade on future expectations."
Jazzi Young's avatar
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