Recently I was asked if I would consider reviewing a new book about coffee giant Starbucks (SBUX) entitled Grande Expectations - A Year in the Life of Starbucks’ Stock. I’m not a shareholder in the company, but I am very familiar with the loyal customer base they have been able to amass over the last fifteen years or so since the company’s 1992 IPO. Although I’m not a coffee drinker, my mother is among the millions who rarely go a day without visiting the neighborhood Starbucks store.
One of the reasons I agreed to read and review the book is because the performance of Starbucks over the last three years has been a valuable lesson for growth stock investors and I was curious to see what conclusions the author, Karen Blumenthal, would draw based on her research. As you may know, Starbucks shares have been dead money since late 2004 despite the company’s continued growth. Even in the face of the chain’s 20% annual growth rate, investors have been disappointed in recent years mainly because although growth has been strong, the stock’s P/E has been compressing, which more than offset any earnings growth.
Blumenthal essentially devoted a year to following Starbucks. She visited investors (both retail and professional), attended the annual meeting, met with analysts, and spoke directly with the company’s management team, all in an effort to find out what kept the Starbucks story ticking and what issues the company and its investors faced every day.
After reading Grande Expectations, it seems to me that there would be three main groups of people who might be intrigued by the work. The first group is the most obvious, Starbucks enthusiasts. The book does a great job of giving readers an inside look at the company’s history, how it operates, and what exactly management spends most of their time thinking about. If you want an insider’s perspective, Grande Expectations will likely be an enjoyable read.
The book is also being marketed as a investor tool to provide “unique lessons in understanding how the market really works.” On this end, I think it is important to distinguish between which type of investor would benefit from the book. I would recommend Grande Expectations for beginner investors who want to learn more about the basics of how the stock market works, how the industry players are related, and how various segments of the investment advisory business (research analysts, retail shareholders, mutual fund managers, etc) play a role in the investment process.
Blumenthal spends a good deal of time talking not about Starbucks specifically, but how, for instance, a research analyst following the company does his/her job, or how a mutual fund manager decides to buy or sell the shares. If you are interested in learning more about these players, in addition to learning about Starbucks specifically, then the book could be valuable.
Aside from Starbucks watchers and novice investors, I don’t think experienced investors, professional or individual, would learn a lot from the behind-the-scenes look the book offers. These people, myself included, already know how the industry operates and I found myself skimming through some of the book, including parts like one that explained Reg FD or the supposed wall between investment banking and sell-side research analysts. If you are looking for new insights as to how the pros do their jobs, in hopes that it will enable you to boost your investment returns, I would say that would only be case if you are not already an experienced investor.
Surprisingly (or not surprisingly given the author is a journalist, not an investor) the book really does not focus much on the reason why Starbucks stock has underperformed in recent years (P/E compression). Most of the investors cited in the book admit the P/E is high, but continue to hold or buy the stock because of the company’s consistent growth. This logic can be acceptable to an extent, and is the reason why Starbucks deserves an above-market multiple, but paying 40 or 50 times earnings eventually will come back to haunt you. Investors have seen this firsthand during the last three years as shares have moved sideways due to P/E compression completely offsetting earnings growth.
All in all, this book provides excellent insights for novice investors and loyal followers of Starbucks, but falls short in providing extremely valuable investment insights that could not be found in most other investing books already on the market. As a result, I would expect other reviews to be mixed depending on which perspective the reader has on Starbucks stock.