How I Predicted Starbucks’ Downfall


by Doug Casey, Casey Research:

Starbucks (SBUX) stock is tumbling.

It’s down 15% over the past 10 days. And I believe it will continue to fall from here.

The iconic coffee chain was one of the best growth stories in modern stock history. It went public in 1992 with 140 stores. Today, it has over 28,000.

But as I’ll show you in today’s essay, it looks like the growth days for Starbucks are finished.

I can’t say I didn’t see the Starbucks collapse coming…

Let me explain.

Last year, I went to the Starbucks annual shareholder meeting in Seattle.

At the time, I owned the stock personally and wanted to learn more about the company’s direction.

I knew there’d be a lot of people attending… so I arrived two and a half hours early.

It wasn’t enough.

After waiting in a line that looped around McCaw Hall, through a giant courtyard, down the side of two buildings, then doubled back on itself… I managed to get a front-row seat in the third balcony.

Capacity at McCaw Hall is 2,963, but the company had an additional overflow venue… which nearly doubled attendance.

I’ve been to other annual meetings for various companies. It’s one of the best ways to really understand the attitude of management. Seeing them talk about the company in person is invaluable. You can read their body language and truly get a feel for how they approach this role… which is of vital importance to your investment.

This meeting was totally different. It was more like a social movement or a Bernie Sanders rally. In fact, as the day wore on, I started wondering if the concept of owning equity in a profit-seeking company even mattered to the attendees.

These people attended merely to demand that the company produce a more eco-friendly cup (see the picture below, and notice the line winding behind them).

“Are you a reporter?” the lady next to me in the balcony asked. “No, absolutely not. I write an investment newsletter.”

The meaning of the job description was lost on her… but she did ask me if I thought the stock would go up.

As a side note, professionals usually ask, “What do you think about XYZ shares?” Novice shareholders usually say, “Do you think XYZ will go up?” The former tends to be better equipped for risk-taking than the latter.

I told the lady I thought the stock was off track and might correct as much as 20%. She seemed concerned, and offended. Last week, we got that correction. Instead of a buying opportunity, I think it’s a chance to get out.

Meeting company management in person and listening to them talk about their plans for the business is the best way I know of to predict its future stock price.

Howard Schultz, founder and outgoing CEO, got a standing ovation. It was his last year in the CEO role and his second time stepping down from it.

My suspicion after listening to him was that anyone taking over from Schultz didn’t stand a chance. You see, Howard Schultz is a megalomaniac. His ego is so large I could feel it on the third balcony of the auditorium. It’s impossible to run a company for the benefit of shareholders if you’re preoccupied with yourself.

When Schultz introduced Kevin Johnson, his replacement, all I could think was this guy won’t be able to turn the lights on without Schultz saying something about it.

So far it looks like my suspicion was accurate. Starbucks is a headless beast.

Incidentally, these in-person observations are important. In 2004, I went to a small shareholder meeting of an insurance firm in North Carolina with my late grandfather. The firm was about to merge with larger insurance firm Lincoln National.

The outgoing CEO was a charismatic gentleman named David Stonecipher. He was the kind of guy that made you feel like you were going to win… even when you didn’t know what the contest would be, or the rules. He just gave you that feeling.

The incoming CEO had a weak handshake. I suspected he wore his cellphone on a belt clip.

I used to think there were two kinds of corporate executives. Those who wore their cellphone on a belt clip, and those who kept the phone in their pocket. The former tended to rely on structure, models, and direct instruction. The latter made decisions based on their assessments of the real-time facts as they could perceive them. That’s who you want in charge of a company your money’s tied up in…

Because of the acquisition premium, Lincoln National later became my largest stock position. Being in my late 20s, “largest” was a relative term.

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