Starbucking the Trend

 

“The company also stuck out their 2016 targets, which included adding 1800 stores, which equates to nearly 34 new stores a week in this 53 week year. 900 of those in China/Asia Pacific and an astonishing 700 in the US. Of course not all are company owned, two-thirds of the new opening in China/Asia Pacific are likely to be licensed, half in the US.”


 

To market to market to buy a fat pig. Wow, what a huge day Friday was for all stocks across the globe. I must admit, I didn’t check all the bourses, there might be some spots of red here and there, in large part it was all go. Our stocks rose nearly three percent, resources up five percent by the time all was said and done. There was a single company that was having some impact, that being MTN which stuck out a SENS announcement during the course of the day that was well received. That and the rocketing oil price, which thankfully put to rest any idea of technical definitions being sensible.

Before we chat about MTN, let us chat again about the technical levels for corrections, bear markets and bull markets. A correction as far as I understand it, is a draw down of more than 10 percent, a bear market is twenty percent and a bull market is when a price is up more than 20 percent from the recent lows. When I saw the notification on my phone from one of the big global news agencies that the oil price was now in a bull market, I had to laugh hard.

For WTI (West Texas Intermediate) crude oil, the 52 week low price of 27.56 Dollars was reached last week. The price is currently 32.47 Dollars, up a lot since last week, so much so that it tests the technical definition for a “bull market” now. Get this though, we are not even 4 weeks into the new year and the same price of oil is down 15 percent year to date. So I ask you, with laughing tears in my eyes, how can oil be in a bull market during the month of January, if the price is down 15 percent year to date? {Insert a heavy dose of sarcasm here} Well done technical terminology, once again you have proven how incredibly useful you are. It doesn’t sound like a bull market to me, it sounds like temporary respite in the face of heavy selling. Or in the case of the knight defending the bridge in Monty Python (missing multiple limbs that have been hacked off), a mere flesh wound?

Over the seas and far away in New York, New York, stocks piled on gains aggressively. Thanks of course to the roaring oil price and sentiment improving, in the wake of the European Central Bank chief, Mario Draghi’s comments the day earlier. The nerds of NASDAQ added over two and two-thirds of a percent, the broader market S&P 500 up two percent and the Dow Jones industrial up “only” one and a third of a percent. Energy stocks rallied nearly five percent, not too dissimilar to the resources sector here. Apple rallied over five percent Friday, remember that earnings are tomorrow evening, after the close.

It wasn’t all plain sailing, American Express was crushed, down over 12 percent as they presented the prospects of low growth. The stock reflects that, the stock trades at less than 11 times earnings with a yield of 2.11 percent, hardly a kings ransom. Berkshire hasn’t had a good time lately, IBM was a disappointment, Wells Fargo (those were better than OK) is lower in anticipation of a slowing rates cycle, and now American Express is slowing. All those stocks are incredibly cheap relative to the market rating however, I am sure that the other of the big four Berkshire stocks, Coca-Cola is not exactly cheap, nor is it growing fast. I am not going to argue with the greatest investor of all time, Warren Buffett knows what he is doing.


 

Company corner

So to MTN quickly. The company stuck out a SENS message, as we said, that had a marked impact on their share price. The stock surged 9.21 percent on the day, yet there hasn’t been much to cheer about this year, the stock is still down over 7 percent year to date and nearly 40 percent lower over the last 12 months. The stock reached a 52 week low of just over 113 Rand a share last week, which meant that Vodacom had, with one quarter of a subscriber base, a bigger market capitalisation. For obvious reasons we know why the MTN share price has fallen, the company has been under the pump for the pending fine in Nigeria. A little bit of “good” news, the market interpreting this announcement that way. So here is a copy paste, titled Further update on the fine imposed on MTN Nigeria:

“The above-mentioned matter came up for hearing before the Federal High Court in Lagos, Nigeria this morning, Friday, 22 January 2016. The judge adjourned the matter to 18 March 2016 in order to enable the parties to try and settle the matter. If the parties are unable to reach a settlement the matter will then proceed on that date.”

 

The market interpreted that it may be favourable for MTN if the courts are telling them to settle. One way or another. I guess as they say in the classics, we will have to wait and see. Obviously the soaring (all relative) oil price would be beneficial, MTN of course operate in territories of large oil exporters, namely Nigeria and Iran. We continue to watch and believe that the fine imposed may be reduced once everyone deliberates with cool heads.


 

Starbucks reported numbers Thursday evening, after the US market closed. The headline from their Investor Relations page says: Starbucks Delivers Record Q1 Revenues and EPS. Many others that I read suggested that a miss and guidance lower would weigh on the stock. It did initially, pre market the stock was down three percent, that however didn’t last for too long, the stock ended the Friday session up one-quarter of a percent. And to think that in the August washout the stock traded in the low 40 Dollars, currently (in the recent washout) the stock is a whisper away from 60 bucks, pretty close to the all time highs of 64 Dollars.

The market rates the stock on a thirty multiple, which means that they expect higher than a 15 percent increase in earnings. Or are investors comfortable to rate stocks higher, when they do have the prospects of raising sales at a faster click than their peers? According to a Barron’s article that I read over the weekend, the stock affords a 15 percent premium to their peer grouping, which at that multiple is not that much. The market really likes the growth trajectory, the market really likes the CEO Howard Schultz. The engine of growth continues to be the US, the company has had a strong December (despite not keeping with the tradition of the cup, red with a christmas tree on it, true story), adding 23 percent to their membership program in the US. That now stands at 11 million strong.

The Japanese integration of now owning all the business (see our piece titled: Starbucks goes bigger in Japan) has boosted revenues sharply. The company also stuck out their 2016 targets, which included adding 1800 stores, which equates to nearly 34 new stores a week in this 53 week year. 900 of those in China/Asia Pacific and an astonishing 700 in the US. Of course not all are company owned, two-thirds of the new opening in China/Asia Pacific are likely to be licensed, half in the US.

All in all, coffee continues to be a strong growth segment globally, both in and out of store. Added to the growth in consumption of their core product, Starbucks is no longer just a morning business, or just coffee for that matter. It has become a destination, all day afair, with a stronger contribution from the food segment, which is growing much faster than the brew segment. We continue to recommend the stock as a core part of your portfolio, it should be part of the makeup of your global growth in consumers from Tokyo to Seattle (that way around), they are soon likely to be here, courtesy of Taste Holdings.


 

Linkfest, lap it up

One of the many ways that we are getting more efficient in our energy use is through the switch to LED lighting. Depending on your cost of electricity, you can recoup the extra cost of purchasing LED within in 3 years by having a lower electricity bill. The LED can then last around 20 years, to me it seems like a no-brainer, change bulbs to LED when they blow and then I don’t have to change them again – LED Lights

The Apple ecosystem is part of the reason that people keep coming back. Part of its value can been seen in Google paying Apple to keep the Google search bar – Google Paid Apple $1 Billion to Keep Search Bar on iPhone.

Josh Brown has a look at how some of the great investors of the past 50 years have reacted when they had down years – The Mark of a Truly Great Investor. Even the best get it wrong sometimes and get smoked by the market.


 

Home again, home again, jiggety-jog. Stocks across Asia are showing gains, US futures are pointing to a muted gain. It is all going to be about earnings this week, which is my favourite, favourite thing in the world. Earnings season! Bring it on.


 

Sent to you by Sasha and Michael on behalf of team Vestact.

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