The answer everyone is looking for in today's market is one that potentially positions portfolios in a way to benefit from the coming FED interest rate cuts in 2024. Because markets are forward-looking, meaning they reflect today based on tomorrow's expectations, here is what can be said to bring that desired answer.
Because money is about to get cheaper as rates come lower, there are a few benchmarks that will move around during that pivot, such as the rate of inflation and the ten-year treasury yield (offering 4.0% today) as the perceived 'risk-free' return to be beaten by the next best thing.
Because of this coming money shift, stocks like Starbucks (NASDAQ: SBUX) are attracting analysts' attention. And here's the truth: regardless of what the FED ends up doing, this is one stock that is almost immune to the economic cycle, and its financials show just why this is one of the best deals out in the market today, but more on that later.
Pillars of strength
When you want to find out just how solid a business is, you can always start by how scalable and protected its brand or product is. While everyone can make a cup of coffee, Starbucks does something no other competitor has been able to replicate, creating a massive value chain that scales every day.
It doesn't really matter if the economy is booming or busting; you still need to get your cup of coffee every morning to go to work, get your afternoon boost to get through a study session, or simply as a pleasantry before sitting down for a casual conversation or even a business meeting.
The point is that coffee is part of life, and Starbucks is the preferred brand. It is almost like social currency, as most people feel proud to carry the green Medusa around. What you can take away from all this is brand loyalty and moats found in a product that doesn't care how personal finances or national economics look.
Knowing what you know now, would it be really that surprising to see the Consumer Discretionary Select Sector SPDR Fund (NYSEARCA: XLY) outperform the S&P 500 by as much as 13.0% in the past twelve months? What should be surprising is to see Starbucks underperform the sector by more than 43.2%.
Look, Starbucks is one of the strongest brands in the consumer sector, right up there with McDonald's (NYSE: MCD), so why would it fall behind the industry the way it's doing now? That's a question for Warren Buffett's crystal ball; all you can guess is that the stock has some catching up to do.
Close the gap
How come other stocks like Chipotle Mexican Grill (NYSE: CMG) and McDonald's are trading at their 52-week highs today. At the same time, Starbucks falls behind at a 20.0% discount from it? Does it matter why it's discounted or that it is discounted?
Because the FED is about to shift the benchmarks lower, namely the bond yields, as 'risk-free' investments, investors will be more willing to accept a bit more risk in stocks just to beat these lower bonds. This is why analysts at HSBC (NYSE: HSBC) have initiated their coverage of Starbucks.
You see, 2024 will be all about growth; if the United States GDP gets a boost from lower interest rates, stocks that aren't set to expand their earnings just cannot be part of any portfolio. This is why Starbucks is set to catch up, as analysts see a 16.7% EPS jump in the next twelve months.
As a comparison, McDonald's analysts see EPS growth of 6.0% this year. Yet, that stock trades at a 12.0% premium to Starbucks, measured by their price-to-earnings ratios. Knowing that McDonald's is at its 52-week high and Starbucks is down by 20.0%, it can be reasonable to expect a catch-up to close that 20.0% gap.
Seems like logic is taking over this time, as the consensus price target for Starbucks sits at $114.2 a share, implying that the stock price needs to rally by 22.1% from today's prices to meet these targets.
Now that you understand more of what the market is looking to get out of 2024, Starbucks could be a more reasonable consideration for your watchlist. And despite the timing of a potential purchase, the stock still generates ROIC (return on invested capital) above 20.0%.
Why is this important? Well, over the long term, stock prices seem to match their price performance to the average ROIC generated by the business. Talk about compounding wealth!
