10 Stocks for 2013: #4 - Starbucks

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At Fastball Financial, we've compiled a portfolio of 10 Stocks for 2013 to provide a portfolio of ten great stocks for:

  1. Diversification across industries and market caps
  2. Growth in some of the hottest themes and industries
  3. Sufficient stability and dividends to offset potential market losses

Thus far, we've named Intuitive Surgical, Apple and F5 Networks to this portfolio.  For our 4th stock, let's look at the restaurant industry, specifically Starbucks (NASDAQ: SBUX).  Over the past couple years, this coffee maker has returned to its roots as a reliable growth story after spending a couple years of struggling to grow.  Now, Starbucks is planning an increasingly aggressive expansion overseas to juice their earnings and send the stock price through the roof.  In particular, the expansion in Asia is the most interesting given how big of a market it is and the fact that Starbucks has generated double-digit comps for eleven straight quarters.

If the solid U.S results and huge potential in Asia aren't enough, Starbucks is also expanding through acquisitions in Teavana, LaBoulange and Evolution.  All of these food and tea products figure to provide additional profits and growth, especially once Starbuck has a chance to apply its business expertise to these relatively young companies.

Valuation

Investing in Starbucks doesn't come cheap.  It has a ton of potential, but you pay for that with a P/E of 31.  The good news is that revenue continues to grow at a double-digit clip, all while cash flows from operations continue to rise.

Dividends

There may be nothing better than a stock that not only gives you high-growth potential, but also provides a solid dividend while you wait.  The aforementioned 31 P/E can be tough to stomach since it prices-in much of Starbuck potential.  However, now that Starbucks provides a 1.5% dividend yield, it's a little easier to buy and hold through any ups and downs to get those regular dividend payments.

Alternates: Panera and McDonalds

Panera:

Starbuck certainly isn't the only game in town.  If you're looking for another similar company as far as philosophy and environment, take a look at Panera (NASDAQ: PNRA).  Panera operates restaurants / cafes in the U.S. and Canada.  Its growth has not only been good, but it has been consistent.  Take a look at this multi-year chart below.  It doesn't get much cleaner and consistent than this.

Unfortunately, Panera doesn't give us a dividend quite like Starbucks does.  But its growth history and potential are stellar and provide investors a lot of comfort for investors.  They are nowhere near saturation in the U.S. and have barely scratched the surface of their market potential in Canada.  Someday, they may head overseas, but that is not necessary yet to drive continued growth.  The domestic market still provides ample opportunity for Panera to give investors excellent returns, particularly in 2013.

McDonald's:

Need a cheaper alternative that offers a better dividend?  McDonald's (NYSE: MCD) operates fast food restaurants world-wide and is one of the best known brands in the world.  Unfortunately, that brand hasn't generated much, if any, growth recently.  Those poor results have sent the stock tumbling of late, but that provides a great buying opportunity for long-term investors.

McDonald's has been counted out by investors before.  Most recently, it was the middle of the past decade.  Investors sold McDonald's hard on fears that they had no future.  Shares were sold all the way down to about $13 at the beginning of 2004.  It's hard to believe that McDonald's ever got that cheap.  Long-term, patient investors were rewarded richly with the stock price now at around $90. Altogether with dividends, McDonald's has generated an approximately 600% total return since the 2004 bottom.  Unbelievable for a company the size of McDonald's.  While this recent sell-off isn't on the same scale, it still represents an opportunity for long-term investors.  Not only are you getting a P/E of 17, but you get a 3.4% dividend yield while you wait.

Bottom Line

With a consistently strong consumer, it's safe to take a good look at restaurant stocks for outsized returns.  There are plenty of good restaurant stocks out there, but for this portfolio, I'm going with Starbucks for their huge organic growth potential in both emerging markets and acquired companies, combined with their 1.5% dividend yield.  If you don't believe in Starbucks' Asia growth or their acquisitions, then take a look at Panera, who has been as consistent of a growth company as they come.  Lastly, if you want a company that's on discount and provides some stability with a good yield, McDonald's is for you.

Thanks for reading!  More to come on our list of 10 Stock Portfolio for 2013 over the next two weeks.  By the way, we're not done with restaurant stocks.  Our upcoming #5 pick is a restaurant company too, so 20% of our 2013 portfolio will be in food-servic


Zaegs owns shares of McDonald's. The Motley Fool recommends McDonald's Corp, Panera Bread, and Starbucks. The Motley Fool owns shares of McDonald's Corp, Panera Bread, and Starbucks. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. Is this post wrong? Click here. Think you can do better? Join us and write your own!

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