Finding the Next Starbucks – Part 1

I just crossed another book off of my Amazon Wish List and got the idea to feature monthly book reviews on The Peridot Capitalist. It might be a stretch to pin myself down to reading a new book each and every month, so I won’t make any promises. But let’s just say that I will plan on sharing positive reading experiences with you all in the future. I won’t commit to a specific review frequency in order to ensure that I make suggestions because they are worth your time, not just because the calendar flipped to a new month.

Anyway, I just finished “Finding the Next Starbucks: How to Identify and Invest in the Hot Stocks of Tomorrow” by Michael Moe, founder and CEO of ThinkEquity Partners. At first I was leery of the book simply because of the title. In my opinion, many investors obsess over finding the next Microsoft or Google, when in reality, the odds of doing so are close to zero. The end result is people getting caught up in “story stocks” without any regard for the stock’s valuation relative to what a reasonable growth assumption would be.

The most recent example of this was Sirius Satellite Radio (SIRI). For months it was the stock I got more questions about than any other. I wrote about it several times back in 2004 and 2005, explaining how the shares were trading at levels that couldn’t be justified with any degree of confidence as far as future financial projections were concerned.

Still, you could tell many people really thought Sirius could be the best performing stock of the next decade and they just had to own it. The single digit price tag fueled the urge even more, as they thought the stock was so cheap. Well, today Sirius stock fetches a mere $2.77 a share (down about 70% in less than three years) and is fighting to merge with their only competitor in order to stay afloat. Sirius and XM Satellite (XMSR) were worth more than $20 billion combined back then. Today that figure stands at just a little over $7 billion.

Despite my initial skepticism, Michael Moe really never started to lead readers down the path that usually results in buying Sirius at 9 bucks. As a result, I was pleasantly surprised with the book because it was able to focus on growth investing, but also did not ignore the valuation component. Too often people assume that if a company grows fast enough, they will make a killing regardless of the price they pay. The book outlines some very good lessons to follow when investing in growth companies, and although I didn’t agree with everything contained in the 300 plus pages, Finding the Next Starbucks is definitely worth a read.

Since it will take quite a bit of space for me to discuss the major points I think are important in the book, I will spread out my comments over several posts in coming days. Stay tuned for more to come and perhaps we can get a solid discussion going as well.