A Stock To Own In Any Market... With 'The Most Loyal Customers In The World'

Austin Hatley's picture

Monday, March 10, 2014 - 10:00am

by Austin Hatley

Would you pay $1,225 for a gift card worth $400?

It sounds ridiculous. No one should be willing to exchange over a grand in cash for nothing more than a few hundred dollars worth of company merchandise -- regardless of what store it is.

Yet despite the absurdity, that's exactly what die-hard customers are willing to pay for a highly-coveted Starbucks (Nasdaq: SBUX) limited-edition gift card.

The rose-gold covered card, which comes pre-loaded with $400 in Starbucks credit, sold out in seconds when the company first released them early last month -- less time than it takes the average barista to prepare one of the Seattle-based coffee chain's signature lattes.

Don't worry though. If you're interested in buying this "limited-edition" piece of Starbucks' history, you can pick one up for just $1,225 on eBay -- more than double what the card is worth in venti Americanos.

It's that kind of brand loyalty that makes Starbucks such a great company... and an even better investment.

In fact, Starbucks' customers are so loyal to their brand that we at StreetAuthority have come to call them some of the "most loyal customers in the world." They don't care that they can walk across the street and buy a similar cup of coffee for about two-thirds the price. They'll pay the premium just so they can showcase the company's signature "green lady" during their Monday morning staff meeting.

That pricing power has helped Starbucks post staggering gross margins over the years. For every $4.00 latte it sells, the company rakes in over $2.25 in profit.

What's more, management has combined those price advantages with superior customer service -- a formula that's historically proven successful in the retail industry.

Dave Forest, the Chief Investment Strategist for our Top 10 Stocks advisory, recently talked about Starbucks' competitive advantages in his latest research report. As Dave said:
 

[Starbucks] stores see solid traffic day after day, month after month and year after year. Remarkably, the coffee chain manages to retain customer interest without ever resorting to gimmicks or promotions.

If you have the best products, and back them up with a high level of customer service, you can charge premium prices. And as we've seen, robust pricing yields superior profit margins. The company generated roughly $2 billion in operating income last year on a revenue base of $13.3 billion.

Those advantages partly explain why Starbucks has been a consistent performer in Dave's Top 10 Stocks "real-money" portfolio. Since it was added in July 2012, the stock has returned over 37%.

Dave isn't the only StreetAuthority expert who likes Starbucks right now either. Michael J. Carr, head strategist of our Maximum Profit advisory, has been bullish on the company since he recommended it to his readers earlier this summer.

As Michael J. Carr told his readers in July:

Starbucks is one of the most successful companies in history. It created a mass market that no one knew existed a decade and a half ago. Premium coffees are now a daily experience for millions of people who once sipped stale coffee throughout their workday. Starbucks created this experience and even developed a new language, teaching customers that a "venti" is a large drink, for example.

This year, Starbucks plans to open 1,300 new stores, including about 600 in China and the Asia Pacific region. Asia could be the next growth driver for the company, and total sales in China grew by 28% last year.

Sales in China have been more profitable than sales in the U.S. and could help the company's bottom line quite a bit in the next few years. In the U.S., the average SBUX store reports sales of $1.2 million a year and cash profit equal to 24.4% of sales ($292,800).

In China, the average store generates $886,000 in sales, with 30.2% of that amount being cash profit. Stores in Asia cost only about $250,000 to open. With a profit of $267,000 per store, Chinese locations are almost as profitable as U.S. stores in dollar terms but require a smaller investment and have lower operating costs. SBUX could grow significantly in China, and that growth will help push profits higher for years to come.

It doesn't hurt that even with Starbucks' big gains over the past few years, both Michael and Dave think the stock has further to run.

But Dave looks at Starbucks a different way...

Instead of focusing on short-term movements, Dave thinks Starbucks would make a great addition to any long-term investor's portfolio. Not only does the company still have plenty of room for growth, but Starbuck's loyal customer base and thick profit margins should make it a strong contender to outperform over the long haul.

Those catalysts are one reason Dave recently picked Starbucks as one of the "Top 10 Stocks for 2014" -- an annual report prepared by StreetAuthority's expert analysts highlighting the company's 10 best investing prospects for the coming year.

Since we first started publishing this annual list, we've beaten the market in seven out of the last 10 years. For comparison, Warren Buffett's Berkshire Hathaway has only beaten the market in five out of the past 10 years.

Of course, nothing in investing is ever certain. But if history is any indicator, then Starbucks -- and the 9 other stocks on our list -- are worth watching in 2014. To learn more about our latest Top 10 Stocks list and how to gain access to this premium report, follow this link.

Austin Hatley does not personally hold positions in any securities mentioned in this article.
StreetAuthority LLC owns shares of SBUX in one or more of its “real money” portfolios.