it is trading at $25. 52 week low is $25 and high is $40. PE is about 32. Sounds like a good time to go in? I know it is a very well run and managed company.
My tip is… don’t take stock market tips that you pick up on a triathlon chat site.
My other tip would be: ask yourself what you know about the company that others (like the professional fund managers who are selling at $25) do not know. “I know it is a very well run and managed company” probably doesn’t qualify. If you don’t have a good answer, then you don’t have a reason to think the stock has an inherent value any different from its market price.
Being at a 52 week high or low is meaningless as an indicator of relative value. Whatever the current price, that is the current consensus view of fair value. Doesn’t mean you shouldn’t buy - if it’s trading at $25, that’s because it’s worth about 25 bucks. Decide based on how it fits within your current portfolio, not because you think that Wall Street has decided to enrich you by selling you a dollar for 50 cents.
Whatever the current price, that is the current consensus view of fair value.
So by this definition, there are no stocks that are under or over valued. By virtue of merely trading on the open market they are at fair value?
I would agree that a 52 week high and low does not indicate relative value but there are indicators that can help determine whether or not a stock is under or over valued. Without doing any additional research than what you’ve provided, the PE ratio would indicate this stock is still over valued.
As a someone who covers restaurant stocks / bonds for a living, I can certainly tell you that it is extremely difficult to gage SBUX’ attractveness by historical stock price range. SBUX is facing lots of headwind regarding commodity price increases, weak consumer discretionary spending, increasing competition and decelerating growth. Milk price along is increasing at double digits, and it is really hurting the margins of coffee companies. Knowledgeable industry analysts think that you are very much making a binary bet witih this name - either this will explode from here or go down a lot. Keep in mind that 30+ PE is still a very high number.
Thank you I appreciate your comments.
So by this definition, there are no stocks that are under or over valued. By virtue of merely trading on the open market they are at fair value?
That doesn’t follow from what I said. By trading in open/liquid/informed market they are trading at the current consensus view of fair value.
Is the consensus or market view the same as theoretical intrinsic value? No, not the same; merely the best estimate. If you know something that the market doesn’t know, then you may in fact have a better estimate, but knowledge in the public domain will already be reflected in the stock price. Most information is in the public domain, and most of what is not is held by ‘insiders’ who are not permitted to trade on that knowledge.
the PE ratio would indicate this stock is still over valued
Any number of pieces of research work have demonstrated that PEs are not significantly correlated with subsequent shareholder returns. A high PE merely indicates expectations of relatively high future returns, which may or may not come to pass.
"A high PE merely indicates expectations of relatively high future returns, which may or may not come to pass. "
A high P/E does not indicate expectations of high future RETURNS, but the current market expectation of high EARNINGS GROWTH. Return expectations are dependent upon the volatility of the stock price (beta) and risk premium.
Any number of pieces of research work have demonstrated that PEs are not significantly correlated with subsequent shareholder returns.
What research pieces are you speaking of exactly? I’ve read an awful lot of research and haven’t come across any such claim. I think the well respected work done by Ken French and Eugene Fama is the best example of research showing PEs are correlated with returns (high PEs = lower returns on average). John Cochrane also wrote a very well-respected paper showing that the aggregate market P/E is predictive of future aggregate market returns: when it gets too high, returns are low and vice-versa.
Is the correlation 100%? Absolutely not. Certainly some firms have better growth prospects than others, so P/Es should differ across firms and industries. Not all low P/E stocks are good investments nor all high P/E stocks bad investments. But if you compared the returns of a portfolio of the highest PE stocks to a portfolio of the lowest PE stocks through the history of the market the average annual return would be much lower for the high PE stocks.
Having been a student of both Fama and Cochrane in the 90s, I totally agree with this point. Most investment analysts do compare a particular stock’s current P/E or EV/EBITDA multiple with its historical average. I really get apprehensive if I see current P/E be significantly above the historical levels unless there are very good reasons for this change - dot-come bubble is a perfect example of this. One piece of investment advice I do feel comfortable giving - buy low and sell high or buy a good company at a decent price.
For a layperson interested in investing, I would recommend one simple book - Joel Greenblat’s “The Little Book that Beats the Market.” - This book tells you to buy companies that have high earnings yield and/or high return on capital at fair prices. A lot simpler than reading regression results of French/Fama/Cochrane. Fun read as well.
what attracts you to SBUX as a buy? for the next 6 mos you can bet safely on the following sectors:
–tech (has not participated in the bull market with exception of AAPL and RIMM)
–fertilizers (potash sask, terra nitrogen)
–defense (GD, LLL)
–energy (ICE, MRO, BHI, CVX which will go to 100 easy)
there are many good stocks priced in the 20-30 range. I would avoid SBUX for now.
"Return expectations are dependent upon the volatility of the stock price (beta) and risk premium. "
Sorry, but the CAPM is dead.
Sure - just even by the fact that CAPM assumes normal distribution. I was trying to simplify general idea of return expectation for the STers, most whom do not seem to be finance experts. In additiona, most analysts I know use CAPM to calculate discount rates to value stock in their discounted cash flow model (of course, adjusting for industry specific measures).
If you would like to argue alternative theories such as APT to the forum and to myself, you are more than welcome. We could also argue about how to correctly assess beta etc.
Sure - just even by the fact that CAPM assumes normal distribution. Or, how about simply that is does not do what it intended to–which is explain stock returns. ** I was trying to simplify general idea of return expectation for the STers, most whom do not seem to be finance experts.** Fair enough, its still an incorrect statement as written. **In additiona, most analysts I know use CAPM to calculate discount rates to value stock in their discounted cash flow model (of course, adjusting for industry specific measures). **
** **Practitioners using an empirically defunct model, now that’s a surprise–how else are they going to hit those nice round number target prices?
** If you would like to argue alternative theories such as APT to the forum and to myself, you are more **than welcome. We could also argue about how to correctly assess beta etc.
No, that would be patently boring, now if you want to venture into the realm of behavioral finance things could get interesting!
No credentials here but I would look for emerging markets. With the credit bubble busting what can appreciate in the future? History does tend to repeat itself. I think the future of investing is very “shiny” so to speak. I stay away from unnecessary consumer products.
Actually, the most promising area currently is commodities. Commodities cycles range between 35 and 60 years, and the current one began somewhere around 2001.
Even with Asia modernizing at an alarming pace, the average Chinese only uses something like 1/10th of the oil of an American and 1/4 the copper, and their population is 4x ours. India’s disparity is even greater. Given that economic liberalization trends are not likely to change in the long term, it certainly puts up a strong fundamental reason as to why demand will certainly be increasing rapidly, and given that supply only gets more difficult to find, this speaks to price.
Likewise, given that the US Government has essentially taken the position that as a debtor nation, it is not in our interest to protect the dollar and continues to devalue it, this further suggests that commodities will be better investments than financial assets for the foreseeable future.
Emerging markets are fine, but it requires some diligence for investment selection, which can be difficult for a US investor. Commodities have the advantage of not being location-specific; i.e., gold is gold is gold, whether you’re in New Guinea or New York. Choosing an Indian housing construction company might require a bit of work and some difficult information collecting.
"Actually, the most promising area currently is commodities. Commodities cycles range between 35 and 60 years, and the current one began somewhere around 2001. "
I know, I’ve been in gold for some time now. Both physical and junior mining and it’s an interesting time now. The recent year long mining stocks consolidation came to an end and things look very bright right now.
I wonder if we’ll see a repeat of the full blown gold mining stocks speculation as it took place during the latter part of the 70s. That would make my life 
What’s your take on gold and silver for the coming months to the end of 07. I think that the PM are very strong and we’ll see a break above 700 in the fall, and then it can run from there. Had it not been for the systematic manipulation and tremendous central bank selling we would bee in that territory already. I wouldn’t be surprised if we reach an all time high above 850 this year. If not in 07 most likely in spring of 2008. What’s your take?
I don’t have a short-term opinion on any commodities.
That said, I think you are better off in the commodities directly, rather than the mining companies.
Gold is not one of my favorites because unlike other commodities, there’s no real fundamentals behind it other than fear and perceived inflation hedge. That’s a little harder to wrap my head around and makes it difficult for me to give serious consideration, as opposed to others which have industrial demand and supply characteristics.