☕️ Is Starbucks a buy?

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Today’s issue highlights Starbucks, Microsoft, and investing in an election year.

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📊 Stock analysis: Is Starbucks a buy?

Starbucks is a global brand but it has been going through a difficult time these days.

Here’s the current situation:

• The stock is trading at $92.80.

• It has a 52-week high of $115.48 and a 52-week low of $89.21.

• The stock has lost -0.93% since the beginning of the year.

• It is down -14.88% in the last 12 months.

• The all-time high Starbucks stock closing price was $119.62 on July 26, 2021.

What experts say: The average price target is $107.59 with a high forecast of $125.00 and a low forecast of $95.00. The average price target represents a 15.94% change from the last price of $92.80.

Challenges and the boycott

Starbucks is being boycotted in some markets and the situation has had an impact on its valuation.

The company has lost $11 billion in value due to poor sales and boycotts amid global political tensions. But, this isn’t the company’s only problem.

The Israel situation aside, Starbucks has received negative attention due to worker and union-related issues. Furthermore, costs are increasing and supply chain issues also exist.

In addition, there are concerns about consumer spending, but now with inflation falling, things might improve.

There are opportunities too

The company has its eye set on some major markets, including India. With its growing population, India can prove to be a profitable market.

Plus, the company isn’t afraid of trying new things and introducing unique items. After a 20% increase in sales for its all-day breakfast menu in the first three quarters of 2023, Starbucks is planning to come up with more new items.

Don’t forget dividends

A major reason to still invest in this company is the fact that it is one of the best dividend stocks.

Starbucks has increased the dividend yearly since 2010 while increasing earnings per share by 855% over the same period. Its yield of roughly 2.2% at recent prices is on the higher end of its historical range, representing an attractive price to buy company shares.

Currently, it dishes out a quarterly dividend of $0.57 per share, which translates to a forward yield of 2.43%. That's backed by over a decade of consistent dividend growth, and a reasonable payout ratio of 60%.

Is it a buy?

Despite all the perks, it isn’t a cheap buy.

The stock is valued at 2.70x forward sales and 22.79x forward earnings, indicating a high cost.

Yet, it’s doing better than its competitors.

The consensus is calling for forward revenue growth of 10.40%, compared to the sector median of 5.23%, with EPS growth pegged at 26.5% against a sector median of -1.74%.

Based on this, we’d call it a buy but it might be a good idea to wait for the next earnings report and ensure the market has taken all the bad news. We see it gaining 10-15% in this year.

📊 Financial Planning

Protecting your investment in an election year

This is the year of elections. We’ll see more than 50 countries go to the polls in 2024. The year will test even the most robust democracies, including India, the US, Portugal, Pakistan, Russia, Bangladesh, Mexico, Iran, The UK, Ukraine, and many more.

Elections can be surprising and the opinion is divided. Some believe that elections positively impact the economy due to politicians trying to improve things to get more votes.

On the other hand, some experts believe that elections weigh on near-term economic growth, forcing businesses and individuals to delay big decisions.

We can expect the new government to make major changes, including tax-related changes. We already saw the government in Portugal fighting over NHR tax status, which can impact foreigners.

In the US, there’s debate about relationships with other countries, changes to Social Security, and the bedrock of retirees’ incomes.

Investors in the US appear concerned. Nearly 50% of investors believe the 2024 elections will have a bigger impact on their portfolios than market performance.

What history says

The benchmark index has averaged a 6.2% gain during the fourth year of presidential elections, going back to President Herbert Hoover's last year in office in 1932.

The period right after Election Day tends to be positive for stocks.

The S&P 500 index has added 5% in the eight weeks following Election Day through the end of the year in the median election year since 1984, compared to a 2.6% gain during the same period during non-election years, according to Goldman Sachs.

Still, stocks could see a milder rally this year. The S&P 500 has gained 6.2% on average during the fourth year of presidential terms since 1932, according to Yardeni Research. That’s below the 13.5% gain the index has averaged during the third year of presidential terms since 1931.

During the first and second years of presidential terms, the S&P 500 has risen 6.7% and 3.3% on average, respectively, according to the same dataset.

Summary:

• Equities. In the year leading up to a presidential election, equities gained an average of less than 6%. During non-election years, the average is more than 8%.

• Bonds. Bonds tend to deliver returns of about 6.5% leading up to presidential elections, significantly less than the 7.5% returns they usually deliver.

But, don’t count solely on historical data, especially because the situation is very different this time.

There are challenges and opportunities

The global economy is in a crisis. There's war in Ukraine, Israel and Gaza are in conflict, and US relations with China are not good, and things might worsen.

On the plus side, rate cuts are expected and inflation is finally cooling off.

So, what to do?

You cannot time the market. Refer to the 2016 situation.

In the early hours of November 9, 2016, futures plummeted as election results trickled in, yet the market closed higher on the day. You need to stick to a solid plan.

It is important to not neglect the need for ongoing rebalancing. The recent rally suggests it might be a good idea to trim equities. However, charts say that the rally may continue beyond this year.

Surprisingly, markets react to not just who’s winning but also who’s participating.

As seen below, market performance is at its lowest when a Republican president is up against a Democratic House and Senate. Interestingly, returns are higher when a Democratic president is working with a same-party Senate but a Republican-controlled House.

So, plan well and remember that your financial plan should never change based on politics, but also don’t neglect the importance of planning long-term. Most serious investors do not make investment-related changes based solely on elections.

"It can be tempting to attribute market volatility to politics, but this year, as in most years, market performance is not so neatly tied into election cycles or political developments," said Naveen Malwal, an institutional portfolio manager with Strategic Advisers. "While political headlines may at times cause short-term ripples in the market, long-term, for stocks, bonds, and other investments, returns seem to be driven much more by the fundamentals of the underlying asset classes,”

Stocks are typically more volatile during election years, and things usually calm down once the election buzz has passed. However, holding can be difficult in such times, especially for people interested in short-term gains.

Also, don’t believe everything politicians say, i.e.: do not make a move based on ‘promises’.

"You have to be very careful about assuming that any angst surrounding the upcoming election may be predictive of future returns. If anything, the more angst you feel about the situation, the more likely it is that markets have already priced it in. In that case, it may already be reflected in market performance, which means markets may be less likely to experience volatility when what you're concerned about comes to pass,” said Denise Chisholm, director of quantitative market strategy at Fidelity Investments.

📰 Investment of the Week: Microsoft

Microsoft, which has done very well in recent times, is our Investment Of The Week.

The company is going to report earnings on Jan 30, 2024. In most cases, the stock sees major movements not only on the day of the report but also the day after it.

The company has historically moved higher heading into earnings more often than not. On average, the stock gained 2.0% for the 2 week period before earnings (based on the last 12 quarters of data).

Furthermore, it has moved higher in the immediate aftermath of earnings 7 out of 12 previous reports. On average the stock moved up 1.2% in the first day of trading after the company reported earnings.

Based on the previous 12 earnings releases, it is highly likely to trade higher 1 day after earnings for an average gain of 0.6%.

Historical data suggests that the options market overestimated Microsoft earnings move 67% of the time in the last 12 quarters, ±4.8% expected on average vs +3.7% in real.

Based on this, we can say that a positive report can help the company gain about 3%, and a negative report could cause it to lose about 5%.

The consensus EPS forecast for the quarter is $2.76. The reported EPS for the same quarter last year was $2.32.

The company has had a great year and most analysts expect it to smash earnings but some bad surprises might be in store so play it right.

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👩🏽‍⚖️ Legal Stuff
Nothing in this newsletter is financial advice. Always do your own research and think for yourself.

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