Starbucks vs. McDonald’s

The fortunes of Starbucks (SBUX-NASDAQ) and McDonald's (MCD-NYSE) have diverged markedly over the past year. And it is debatable whether the the decline in Starbucks is a bigger story than McDonalds ascension; McDonalds increased its market cap by roughly $16 billion in 2007, of which perhaps $3-$4 billion came at the expense Starbucks as McCafe's roll out, but bottom fishers are coming out of the woodwork as Starbucks' stock finally approaches levels the growth at a reasonable price (GARP) crowd can live with.

And Andrew Bary of Barrons has it on a list of bounce candidates for 2008:

Just a year ago, Starbucks traded close to $40 and was considered unstoppable. Now deemed a busted growth story, it trades around $18. Growth investors have bailed out, and many value investors consider the stock to be too dear at 18 times forward earnings. Yet profits still are growing at a 15% clip. There could be rising pressure on management to scale back Starbucks' rapid domestic expansion in the face of cannibalization and falling returns. If Starbucks shifts gears as McDonald's did a few years ago, the stock could benefit. Barrons

David King of Putnam Investments is pitching a dozen beat down stocks that he thinks will bounce this year, including Starbucks of course.

American International Group (AIG)
Bear Stearns (BSC)
Comcast (CMCSA)
Comerica (CMA)
SunTrust (STI)
Gannett (GCI)
Legg Mason (LM)
Kohl’s (KSS)
Micron Technology (MU)
Southwest Airlines (LUV)
Time Warner (TWX)

A pretty dodgy list there; several of the banks are trading as if the dividends will soon be cut. These stocks could be in for a rough first half of the year, scaling in slowly on weakness might be the only way to sensibly work with these names. Although Jean-Marie Eveillard, who recently came back from retirement, is behind Brian Roberts of Comcast and thinks the stock is worth $30, which would be a healthy bounce from its current quote.

If you put a gun to our head we might be willing to buy Kohl’s, but would rather buy Research in Motion than any of these names. Although we agree with one of King’s observations on 2008:

David King, who runs the Putnam New Value fund, says that investment managers, particularly those with a value bent, essentially have one decision to make for 2008.: “Do you want to take risk relative to the U.S. consumer economy and the crisis in the mortgage market?”

Although the entire world is now aware of McDonald’s assault on Starbucks, this video has the details of McDonald’s new pricing strategy and entree into “premium products”.

Ready to Bounce: 12 Stocks for the Year Ahead
Barrons

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The content contained represent the opinions of 1440 Wall Street. This commentary in no way constitutes a solicitation of business or investment advice. It is intended solely for the entertainment of the reader, and the author. No Positions

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