Is That It for the Melt Up?
Bill Ackman reveals his latest $900 million bet... Is the activist investor an Extreme Value reader?... A market legend echoes Porter... Another American icon is circling the drain... Is that it for the
Hedge-fund manager Bill Ackman caused a commotion yesterday...
Speaking at the Grant's Interest Rate Observer conference in New York, the activist investor announced he had taken a massive $900 million stake in coffee chain Starbucks (SBUX).
This comes just three months after shares hit their lowest level in more than three years. But Ackman said he believes the company's "recent challenges are fixable with appropriate management execution." As Bloomberg reported...
The issues dragging on same-store sales in the U.S. are temporary, Ackman said, citing recent changes to its loyalty program and weak sales of Frappucinno and other core beverages. He was encouraged by management's recently announced plans to reinvigorate sales through new premium products, new concepts for boutique stores, healthier offerings and a roll-out of an improved mobile ordering and payment app.
Ackman also cited massive upside potential in China, which he believes will "represent an increasingly larger percentage of the company's earnings." And he's bullish on the company's plans to reward shareholders. More from the article...
Starbucks has a "long runway for high-single-digits" growth led by its expansion in China, Ackman said. Shareholders will also benefit from its plan to buy back roughly $14 billion shares over the next two years, an amount equivalent to about 20% of its current market capitalization, he said.
"We estimate that every dollar Starbucks spends building a new store in the U.S. or China is worth $10 to $15 shortly after the store opens," he said in the presentation. "China will become increasingly important to the value of Starbucks over time as it represents Starbucks' single-largest unit growth opportunity."
Ackman predicted that Starbucks shares could more than double over the next three years. The stock rose as much as 5% in intraday trading yesterday to near $60, before closing up 2.1%.
If Ackman's investment thesis sounds familiar to you, there's good reason...
It's almost as though he were reading directly from the August issue of Extreme Value, where our colleague Dan Ferris recommended shares of this "World Dominator" to his subscribers two months ago today.
Here's what Dan had to say about Starbucks' growth potential in China...
Now that the store count exceeds 17,000, the Americas segment – which primarily consists of U.S. operations – is not the growth engine it once was... For bigger growth potential, you have to go outside the U.S., to a region where Starbucks currently gets less than 20% of its overall sales...
Starbucks opened its first Chinese store in Beijing in 1999... Today, Starbucks has roughly 3,400 stores and 45,000 employees in China. It opened its largest store in the world (30,000 square feet) in Shanghai last December.
That's just the beginning. Starbucks opens a new store in China about every 15 hours. That's not a typo. It plans to sustain that pace for a total of 6,000 stores in mainland China by 2022.
As Dan noted, there are two reasons in particular why the growth opportunity is so much greater in China...
The first is China's huge population. In the U.S., Starbucks has one store for every 23,000 people. But China has just 3,400 locations for 1.4 billion people – or one store for every 416,000 people in China. More from Dan...
If Starbucks gets to just half its U.S. store density in China, it'll wind up with 30,000 stores there, more than double the current U.S. store count. Couple that with Starbucks China CEO Belinda Wong's comments – that "China's per-capita coffee consumption is only 0.4 cups per year compared to more than 300 cups consumed here in the U.S." – and the potential seven to 10 years out is likely bigger, due to China's young and growing population.
The second, Dan pointed out, is that Starbucks' Chinese locations are significantly more profitable...
Management reports an 80% return on investment for its Chinese stores, due to lower labor costs and lower store rents.
Schultz gushed about the new 30,000-square-foot Shanghai store on the company's January earnings call (emphasis added)... "Our U.S. Starbucks stores, on average, do about $32,000 a week. The Roastery in Shanghai, after eight weeks of operations, is doing twice that not each week, but each day."
The Roastery celebrates its one-year anniversary in December. Stores tend to perform better when they're newly opened and taper off after one year (hence the need for same-store sales growth comparisons).
Like Ackman, Dan also highlighted Starbucks' plans to return billions of dollars to shareholders...
He expects the company's aggressive plan could keep a floor under the share price over the next
Last fall, it announced a plan to return $15 billion to shareholders in the form of share repurchases and dividends through 2020. It expanded the program to $25 billion in June. It has already returned $5 billion of that through the third quarter of fiscal 2018.
We expect dividends to contribute roughly $4.5 billion to the remaining $20 billion, and the rest as share repurchases through 2020. At the current share price, that could lower the company's outstanding share count by about 21%, from 1.4 billion currently to 1.1 billion in 2020.
We expect Starbucks will continue to pay dividends and repurchase shares after the current program is finished. John Zolidis, president of Paris-based Quo Vadis Capital, who I've known for several years, said in a June presentation that he estimates Starbucks' total capital return – dividends and share repurchases – could exceed its $71 billion market cap in less than 10 years.
If management can fully execute its plan, Dan believes shares could rise 50% or more...
But even using his most conservative projections, he says the stock should trade in low $70s. Even after yesterday's big gain, that would represent roughly 30% upside from here...
The longest it'll take for this to happen is about four years, which would equate to compounding of roughly 10% per year, our minimum acceptable annualized return. We doubt it'll take much more than two years, though. In that case, we could see compounding of roughly 20% per year. That's an excellent rate of return.
China could and should easily become a larger business for Starbucks than the U.S. The company's China/Asia-Pacific sales are already roughly one-fifth of total revenues. This could be a fantastic opportunity to pick up a World Dominating brand name just prior to a reinvigoration of growth.
It's either a good opportunity to earn a nice return for a few years, or an insanely great opportunity to compound your money at high rates for the better part of a decade.
Shares are currently trading just below Dan's maximum "buy up to" price. But Extreme Value readers are already up as much as 11% in two months so far. Kudos to Dan and Extreme Value readers who followed his advice.
By the way, this isn't the first time Ackman has followed in Dan's footsteps...
Last year, Ackman established a $180 million position in payroll-processing giant Automatic Data Processing (ADP). He has since bought another 2.5 million shares, making it his sixth-largest holding, worth more than $560 million.
But Ackman would
Ackman wasn't the only big name echoing Stansberry Research analysts yesterday...
During his own presentation at Grant's, legendary investor Stanley Druckenmiller – who famously earned 30% average annual returns over his career without a single losing year – warned that rising rates will eventually set off a "wave of bankruptcies" in highly indebted "zombie" companies.
He also pointed to the retail sector as among the most
Seriously does anyone know why Sears is still in business? What function is Sears serving our society?
Again, this should sound familiar to longtime readers...
As Porter explained most recently in the April 27 Digest...
I am more and more convinced that the next several years will be extremely difficult for most equity and bond investors...
What's the big problem?
The extremely low interest rate regime of the last decade (created by the Federal Reserve manipulating the credit markets) encouraged many companies that should have failed to continue to borrow money. As a result, there are now several hundred publicly traded corporations that cannot possibly repay their debts. These "zombie companies" cannot even afford their artificially low interest rates.
Several hundred American companies are destined for bankruptcy or are on the verge of it.
And of course, he has also warned readers countless times about the huge problems in the retail sector, and in a handful of the most troubled companies like Sears (SHLD) and JCPenney (JCP) in particular. From the August 18, 2017 Digest...
My top, most certain trend is the death of retail. I have no doubt that within 10 years, more than half of the retail space in America will no longer exist. And that's probably too conservative an estimate. The destruction in retail is likely to be far worse and occur far faster, like a 75% decline within five years...
Consider a few important facts... Between 1970 and 2015, the number of malls in the U.S. grew twice as fast as the population. As a result, America has a truly absurd amount of retail space per capita – about six times more than anywhere else in the world (except Canada, where thanks to Sears Holdings (SHLD), retail was grossly overbuilt, too).
America has more than 7.5 billion square feet of shopping center space. That's about 23 square feet of mall space per person. On a per-capita basis, that's 10 times more than Germany.
There are lots of ways to invest in this trend. JC Penney (JCP), Sears, and Macy's (M) will all go bankrupt... You can short their stocks.
We will give Druckenmiller credit for one thing, however...
His warning about Sears was incredibly prescient.
You see, just hours later, news surfaced that the company is now preparing to file bankruptcy. As the Wall Street Journal reported last night...
Sears Holdings has hired M-III Partners LLC to prepare a bankruptcy filing that could come as soon as this week, according to people familiar with the situation, as the cash-strapped company that once dominated American retailing faces a debt payment deadline.
Employees at M-III Partners, a boutique advisory firm, have spent the past few weeks working on the potential filing, the people said. In recent days, M-III staff have been at the retailer's headquarters in Hoffman Estates, Ill., one person said. Sears continues to discuss other options and could still avert an in-court restructuring, the people added.
Sears, which has been losing money for years, has $134 million in debt due on Monday.
Shares fell 17% today, closing at an all-time low of just $0.49.
Of course, Sears wasn't the only stock in the red today...
The broad U.S. markets suffered their worst one-day decline since February's volatility panic. Both the Dow and the S&P 500 fell more than 3%, while the tech-heavy Nasdaq led the decline with a 4% loss.
While sharp declines like these can be jarring, we'll remind you not to get too bearish yet.
As we've discussed many times in recent months, all of the most reliable stock market, credit market, and economic indicators we follow continue to give the "green light" today. They tell us it's still too soon to worry about a true bear market or a recession. History suggests the "
But we'll also remind you that this doesn't mean we can't see further downside in the near term.
As we've noted many times, history also suggests sharp bouts of volatility – like the one we experienced in February – could become more frequent as the
In other words, if you want to profit from the Melt Up , you must be prepared for more volatility...
Of course, for most investors, this is easier said than done. You're likely to panic and sell too early... or worse, hang on too long.
That's why we're preparing a special event this month...
On Wednesday, October 24, Steve Sjuggerud will sit down with some of the biggest names in finance – in front of a live studio audience – to discuss exactly what you should do with your money during the final stage of this long bull market.
We guarantee this event will be unlike anything you've seen from us before. Whether you're currently leaning bullish or bearish, you don't want to miss it. You'll even get the name and ticker symbol of one of Steve's favorite Melt Up recommendations – a stock that he believes
New 52-week highs (as of 10/9/18): none.
A relatively quiet day in the mailbag. Where
Regards,
Justin Brill
Baltimore, Maryland
October 10, 2018