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Starbucks Looks Set to Head Lower

- By Akshansh Gandhi

Starbucks (SBUX) has been trading sideways for almost two years now. Although the company has reported decent growth, its high valuation has prevented it from heading higher. With Starbucks' growth slowing down, investors are more wary about buying the stock at current levels as it is trading at more than 28 times trailing earnings.


Although Starbucks' earnings have improved, they haven't improved at a decent enough speed to make its valuation more reasonable as Starbucks is trading near its historic valuation. As a result, Starbucks has been an underperformer as the market has been making new highs. Going forward, I expect Starbucks to continue underperforming as it will be difficult for the company to justify its current valuation amid slowing growth.

According to data from mobile specialist xAd, the percentage of total restaurant traffic claimed by Starbucks fell to 11% in February from 12% in January. Starbucks underperformed in comparison to its peers, which could be a result of new initiatives from peers Dunkin' Donuts (DNKN) and Panera Bread (PNRA).

Up until now, Starbucks has leveraged its brand value to extract more money from customers, thereby making up for the slower growth. However, going forward, this trend can't be expected to continue and slowing growth will eventually have an impact on the stock.

Moreover, Starbucks has been accused of being too political after it announced its plans to hire 10,000 refugees. Since the move was announced after President Donald Trump's travel ban, many people started boycotting Starbucks, and this may translate to lower sales in at least the upcoming quarter.

Companies disclosing their political affiliation don't really work well as they end up alienating a vast portion of their consumer base. Hence, Starbucks' virtue signaling may eventually backfire as the company will end up angering an important portion of its user base.

Conclusion

Starbucks has been trading sideways for quite some time and I don't expect this trend to change soon. Starbucks failed to participate in the post-Trump market rally and with the market already at all-time highs, buying Starbucks at current levels doesn't look like a wise decision. Investors should avoid Starbucks and only open a long position if the stock falls to under $45 in the weeks to come.

Disclosure: No position.

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This article first appeared on GuruFocus.