Tuesday morning Starbucks (SBUX) stock launched back into orbit going from $77.03 per share to $95.90 (a 24.5% increase). My wife Sarah isn’t complaining because her purple mug was full of French Roast coffee and her portfolio was loaded with Starbucks shares. As for me, Monday afternoon I played eeny, meeny, miny, moe trying to decide whether to invest in Nike (NKE) or Starbucks for my portfolio. I caught Nike by the toe. That’s what I get for playing children’s games during market hours. Oh well, I believe Nike will get back on its horse and ride off into the sunset one of these days too.

 

This is probably old news by now, but Tuesday morning Starbucks announced Brian Niccol will be their new CEO, replacing outgoing CEO Laxman Narasimhan. Lax had only been in the role since April of 2023 when Starbucks told him to reLax and turn in his green apron. Lax came to Starbucks from the consulting industry and was probably lacking real world restaurant experience, not to mention Starbucks was dealing with employees unionizing and an inflationary environment.

 

Brian Niccol has a deep understanding of the restaurant industry. Starbucks lured him out of Chipotle (CMG) with a very lucrative pay package including a $10 million signing bonus. He guided Chipotle through their food-borne illness crisis, implemented food safety training, and returned the company to its previous glory. Prior to that he was the CEO of Taco Bell where he also overhauled the Bell and restored its shine. The question is why is Mr. Niccol jumping off a perfectly good ship. My guess is he’s not one to sit by the pool and soak up the sun. He’d rather be out to sea battling the wind and tides.

 

While Starbucks stock soared, Chipotle’s stock took a nosedive from $55.87 down to $51.68 (a 7.5% decrease) and even hit a low of $48 during the trading session. To illustrate how irrational this is, let's consider what the stock price movements of Starbucks and Chipotle imply using our old friend market capitalization (the stock price times the number of shares outstanding).

Starbucks gained $21 billion in market value overnight while Chipotle lost $5.7 billion in market value overnight. To me it doesn’t seem rational because nothing happened overnight to change the value of either company. Starbucks didn’t see a windfall of sales overnight nor did Chipotle lose sales overnight. In fact, Brian Niccol doesn’t even begin work until September.

 

In class I teach the concept of Mr. Market and this is a perfect real life example. Warren Buffett’s friend and teacher at Columbia University, Ben Graham uses the parable of Mr. Market to describe the wild fluctuations in stock prices. To paraphrase, Ben Graham describes Mr. Market as a crazy fellow who can be wildly optimistic one day and quote an unreasonably high price for a stock and incredibly pessimistic the next day and quote a wildly low price for a stock. It is these wild price swings that allow us investors to take advantage of Mr. Market and buy at low prices and sell at high prices. You can read the entire parable of Mr. Market in Warren Buffett’s 1987 Annual Letter here.

 

By knowing the value of businesses we can take advantage of Mr. Market’s wild mood swings. In the case of Starbucks I thought the stock was undervalued Monday night at $77. After Starbucks announced its new CEO the stock price had a massive run up (to $96) and now I believe the stock is fairly valued. Since we want to buy businesses when they are undervalued, there is nothing more to do here. We’ll hold on to our shares and hope that Brian Niccol can resolve the issues at Starbucks and get it firing on all cylinders again.

 

As for Chipotle, I believe the stock was overvalued Monday night and despite the drop in price is still overvalued Tuesday night, so there is nothing to do here either except wait for Chipotle to double its store count to 7,000 over the coming years. In this case, Sarah was rewarded for investing in a high quality company at an undervalued price. She even received dividend payments while she waited for the stock price to recover. Mr. Market could still freak out and drive the stock price lower over the coming months if Brian Niccol doesn’t have an immediate impact, but as rational investors we know that real change takes time and hard work, not just a flashy press release.

Since Warren Buffett’s company Berkshire Hathaway is a publicly traded company he is required by the SEC (Securities and Exchange Commission) to report the stocks that he bought and sold during the quarter on a financial document called a 13F. We could go to the government website and pull the document, but there is an easier way. A website called Dataroma pulls all this data for us and serves it up on their website. Not only do they pull what Warren Buffett bought during the quarter, but they do this for many popular investors they call Superinvestors. It’s a wonderful free service and one I like to visit to find investing ideas. Besides Warren Buffett, some of my other favorite Superinvestors are Pat Dorsey (started Morningstar’s stock analysis), Mohnish Pabrai (paid $650,000 dollars to have lunch with Warren Buffett), Michael Burry (The Big Short movie). I like to go through Dataroma to see what some of my favorite investors are buying to get investing ideas. If something piques my interest, I’ll do a deeper dive to see if the company is a fit for me.

 

Warren Buffett reported his portfolio holdings for the second quarter of 2024. His notable buys are:

None of these companies are in my circle of competence, but it was worth taking a look at what the big guy was doing.

 

The biggest news from the report was he sold about half of his stake in Apple. This generated a lot of speculation about why he sold such a large number of shares. Has his opinion of Apple changed? Does he think a recession is coming? Will he use the cash to make a large acquisition? Nobody knows what Warren is up to, but he does have about $277 billion in cash right now. He will need to keep $30-50 billion to cover insurance claims, but that still leaves over $200 billion to play with. He’s been buying Chubb (CB) stock for four quarters now, maybe he’ll buy the whole thing. Warren does love insurance companies. The only issue may be getting the deal past regulators since he already owns a large chunk of the insurance industry.

Over the years I've come across investing tools that make researching companies much easier. This week I updated the “Free Stuff” page of my website with three of my favorite tools.

 

The first tool is Dataroma, the tool I mentioned above to find out what Warren Buffett is buying and selling. I like to see what some of the brightest minds in investing are buying. Sometimes I find a company I’m interested in and can take the company through my research process. The one warning about buying what the smart investors are buying is that they are only required to report what they are buying and selling every three months. If a superinvestor sells a stock at the beginning of the quarter, you won’t know about it until after the quarter ends. Caveat Emptor!

 

The second tool I added to the toolbox is Morningstar. Morningstar is an incredible resource. I’m a long-time user of their website. I currently have a Morningstar membership which gives me access to analyst reports on companies and mutual funds. The analyst's reports allow me to get up to speed on a company quickly. They provide background on the company, discuss their product lines, competition and determine a fair value to pay for the company. In my opinion the membership fee of $250 per year is well worth the price of admission because it's like having a stock analyst by your side all the time. The larger libraries such as Enfield and South Windsor offer free access to Morningstar and you can access it from home with your library card number. If you don’t have a library card in those towns you can still go in person and access it for free. Morningstar offers a lot of high quality articles and videos for free on its website, so it’s well worth stopping by frequently.

 

Finally, I added a link to QuickFS, my favorite tool for researching the financials of a company. QuickFS offers a free account. All you have to do is sign up with your email address. Once you set up a free account you will have access to ten years of a company’s financial history including the income statement, balance sheet, and cash flow statement. Whenever I come across a new company, the first place I go is QuickFS. They provide a summary of what the company does and where they are based. Then I’ll run through each of the financial statements to see if they have strong financials and low to no debt. Within five minutes I know if this is a company worth pursuing. 

I didn’t see any stocks that really excited me this week, so I’m going to sit on my hands and let the funds build up in the Itty Bitty account. I was considering Nucor (NUE), the leading steel producer in the US and seventh in the world. I really like this company, but due to the cyclical nature of the business I wasn’t comfortable buying it at this price level. I’d like to buy it at a lower price so I have a bigger margin of safety and a higher dividend yield (currently only 1.51%). The cash balance in the Itty Bitty Portfolio will increase to $250, so next week I can look at some higher priced companies.

 

Even though I didn’t find any bargains in the stock market this week. Sarah and I were shopping at Costco last night. After finishing our monthly shopping we decided to stop into Costco’s liquor store. Sarah spotted Octopoda Pinot Noir for just $9 a bottle (normally $18+). We love Octopoda wines and can’t wait to enjoy this one “After Hours.”

 

Remember the companies mentioned in the Navigator are for informational purposes only. If you decide to buy any of the companies mentioned in the Navigator please do your own research or consult your financial advisor.

 

Cheers!      

 

Brian