We’re initiating a position in Starbucks (SBUX), buying 275 shares at roughly $84.72 each. Following the Monday’s purchase, SBUX will represent about 0.75% of the portfolio. Starbucks is getting called-up from the Bullpen , our watch list of stocks that we’re considering adding to Jim Cramer’s Charitable Trust, whose holdings serve as the Club’s portfolio. With this purchase, SBUX will join 32 other stocks in the Trust. We first discussed Starbucks our August “Monthly Meeting,” when the stock traded at around $87 per share following a better-than-expected earnings report. After a few small down days in a row, shares of the coffee retailer quickly got away from us and pushed above $89 last week. But we didn’t chase the stock higher as we held firm to our belief that a better price was out there. We just had to stay patient and let the overbought market and the froth related to the Bed, Bath & Beyond (BBBY) meme-stock mania shake itself out. That’s why on Friday, we updated our view on SBUX, saying we would be buyers under $86 in a market that was no longer overbought, according to the S & P Short Range Oscillator. We believe our patience is being rewarded Monday as stocks sold off aggressively due to a combination of factors, including a rising 10-Year Treasury yield back above 3% (higher rates are a headwind to equity valuations), the expected fallout from the meme stock mania , and technical considerations, amongst other reasons. With the market no longer overbought after Monday’s selloff and SBUX now trading around $84 per share — more than 2.5% below where the stock traded when we added it to the Bullpen — we are dipping into our large cash position that we recently built-up and starting a new investment in Starbucks. As indicated in our initial Bullpen report, our bullish thesis in SBUX is predicated on the return of Howard Schultz as interim CEO and the improvements he’s making to the company. One of the first decisions Schultz made was to suspend the share repurchase program. While some shareholders may have groaned about this news at first, we think this decision will be best for the long-term growth of the company. We normally seek out stocks with large capital return to shareholder programs unless the cash can be better utilized. While share repurchases are suspended at Starbucks, the stock around $84 pays nearly a 2% dividend yield. Starbucks believes that buying back shares provides returns, on average, of about 10% and Schultz is unsatisfied with this return on investment. Under his guidance, the company plans to increase investments in the business, like innovation around technology and personalization, accelerate new store growth with a focus on drive-throughs, and improve efficiencies and speed of service. Take for example cold beverages, which make up about 75% of Starbucks’ total beverage sales in the U.S. Since cold beverages are a relatively newer trend, some of the company’s older stores may not be best fitted with the right equipment to serve these beverages to customers. This is probably one of many areas that needs new investment. In turn, such moves will lay a foundation for stronger company and create a better place to place to dine in, pick up, and perhaps most importantly, work. This last point is important as management works to foster a better relationship with its partners (employees) at Starbucks’ U.S. company-operated stores. Some locations have unionized or union organizing is underway. Although the union push issue creates some risk, ultimately, we believe Starbucks will successfully navigate through this thanks to the wage increases that were announced back in October 2021 as well as the expected investment in its stores that management plans to make. Of course, the debate right now is how much will the new investments hit margins and what will margins and same stores sales growth look like in the future. We should get an answer to this question at the company’s Sept. 13 investor meeting event, which could be a positive catalyst event for the stock. At the event, Schultz plans to showcase how accretive to the business this reinvention plan will be, setting up Starbucks for a strong fiscal 2023 and beyond. The announcement of a new CEO could also happen at the September meeting, and this news could be another positive catalyst for shareholders if it is someone Wall Street likes. While the September meeting will trace out what Starbucks will look like in the future, it is important to note that the business today has plenty of momentum. In the company’s most recently reported quarter , North America comparable sales were up 9% with ticket growth up 8%. Importantly, Starbucks has not seen any trade down at its stores. It appears that the daily routine of buying Starbucks coffee is something people do not want to give up despite higher inflation. China is obviously a question mark as Covid mobility restrictions and limits on in-store dining have hurt business there. However, management said on its post-earnings call earlier this month that trends in the region immediately improved following Shanghai’s reopening in early June. The stock isn’t exactly cheap at 27x next twelve-month earnings, but we believe several important catalyst events in progress could help push the stock higher. We will be paying close intention to new financial targets and initiatives spelled out at the Investor Day event, the naming of a permanent CEO and the ongoing China reopening. Still, we think it is prudent to start our new position on the relatively smaller side due to the market’s current volatility and the uncertainty regarding future China lockdowns. China is currently trying to control an outbreak on the southern island of Hainan, a popular beach and resort town. As always, we plan on using our timeless strategy of slowing scaling into new positions on weakness, an approach that has worked out quite nicely for us this year, especially with Danaher (DHR). We are initiating our SBUX position with a price target of $95 per share, representing roughly 27x calendar year 2023 earnings estimates. But revisions are likely after management updates its financial framework and capital allocation at the upcoming Investor Day next month. (Jim Cramer’s Charitable Trust is long SBUX. See here for a full list of the stocks.) As a subscriber to the CNBC Investing Club with Jim Cramer, you will receive a trade alert before Jim makes a trade. Jim waits 45 minutes after sending a trade alert before buying or selling a stock in his charitable trust’s portfolio. If Jim has talked about a stock on CNBC TV, he waits 72 hours after issuing the trade alert before executing the trade. THE ABOVE INVESTING CLUB INFORMATION IS SUBJECT TO OUR TERMS AND CONDITIONS AND PRIVACY POLICY , TOGETHER WITH OUR DISCLAIMER . NO FIDUCIARY OBLIGATION OR DUTY EXISTS, OR IS CREATED, BY VIRTUE OF YOUR RECEIPT OF ANY INFORMATION PROVIDED IN CONNECTION WITH THE INVESTING CLUB. NO SPECIFIC OUTCOME OR PROFIT IS GUARANTEED.
