The Day Ahead: If You Must Buy

 | Jun 25, 2013 | 8:00 AM EDT
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Around 3 p.m. EDT Monday, I angrily tweeted, "Spotted: dip buyers luring in suckers." At that point, the Dow was lower by approximately 69 points, and I could feel enthusiasm building that a brief pause in market hammering was nearing a conclusion.

Oopsie -- think again, stud. Those #FeralHogs indeed lured in the suckers, using the strength to lighten up further, leaving those suckers with a growing distrust in any short-term sign of life in the market. Them's the mind games that transpire when the market is in a full-scale adjustment mode. Rallies are mere optical illusions.

I want to shed some light on an initial attack plan I'm constructing that will eventually have me wade back into the dangerous waters of the market. I'm remaining very cautious here overall. But, if you must get money into the market for fear of losing clients, or if you detest holding cash, here are some worthwhile criteria.

Briefly, worthy buy candidates are stocks with high price-to-earnings multiples that deserve the high P/E due to the following:

  1. upcoming new product introductions that will actually be purchased;
  2. product price increases either taken in the past six months or planned for the next six months;
  3. locked-in deflationary input costs; and
  4. a business unlikely to be materially fundamentally altered by global interest-rate increases by the end of 2013 or the front half of 2014.

Starbucks (SBUX) fits the bill, in my view. I talked with the company recently, and here are a few tidbits I learned.

The Case for Starbucks

First, Starbucks' management is strongly focused on giving a remodeled store local flavor by using elements relevant to that store's outdoor setting -- lumber, pictures and so on -- and communal tables are also being installed. These solid tactics for keeping people in the stores longer and spending more.

When I asked management whether a remodeled Starbucks gets a sales pop immediately after completion, they answered, "There is no lift." Why? The sales trend never slowed to begin with! Ultimately, I believe these U.S. remodels are a nice way to make sure the brand remains the go-to destination for years to come, and to thwart the advances of upstart local businesses with an anti-Starbucks message and an intense attention to drink preparation.

Another factor Starbucks has going for it: its partnership with Square, which has had interested me from its inception. Together with the increased number of Starbucks drive-thru locations, I think this combination is poised to bring on-demand-coffee ordering to a generation of workers who need to travel further to reach their place of employment. McDonald's (MCD) and Dunkin Donuts (DNKN) are nowhere near offering this capability.

Bigger vision aside, it was encouraging to learn that Starbucks is "seeing an increase in mobile payments" at stores accepting Square. Also, since Square handles interchange fees, Starbucks is also enjoying backend cost savings.

Moving on, Starbucks' first juicery also goes live in the next few weeks. That will allow the company to ramp production of its pricey, but tasty and healthy, Evolution Fresh drink line. The product will be in all Starbucks stores by year-end. My sense is that handcrafted Evolution Fresh drinks -- whether by a barista or perhaps a person specially trained in juicing, and in a different uniform -- will arrive at select Starbucks locations rather shortly.

Finally, you may not have noticed, but Starbucks' new loyalty program for its bagged grocery-store coffee went live in May. The reason why you likely missed it: Starbucks has engaged in basically no marketing, as it's waiting for inventory with old packaging to run its course.

In any case, though, look for marketing -- and perhaps signage -- in grocery stores in July. The program will definitely demonstrate how Starbucks is different relative to most bagged-coffee providers. For instance, members of the loyalty program will receive one "star" per bag, and 12 stars can be turned in for anything at a Starbucks retail store. Does Folgers offer that?

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