Starbucks in Your Home

Featuring Lutts’ Logic:

Where’s the Truth?

My Two Cents on Chrysler

Starbucks in Your Home

In the deluge of media coverage of President Barack Obama’s 100th day, I noticed something odd.

The New York Times (currently hemorrhaging money) said, “Mr. Obama’s 68% job approval rating is higher than that of any recent president at the 100-day mark.”

The Washington Times (founded in 1982 by Unification Church founder Sun Myung Moon and a money-loser every year since) said, “Americans have a lower opinion of Mr. Obama at this point than all but one president since … 1969 …  The only new president less popular was Bill Clinton, who got off to a notoriously bad start after trying to force homosexuals on the military and a federal raid in Waco, Texas that killed 86.  Mr. Obama’s current approval rating of 56% is just one tick higher than the 55% approval Mr. Clinton had during those crises.”

And the Wall Street Journal (which actually reported circulation growth this week) said, “61% of people approve of the job Mr. Obama is doing as president, better ratings than George W. Bush or Bill Clinton had at the 100-day mark.”

At my son’s high school, 56 means you’re failing, 61 is a D- and 68 is a D+, still nothing to brag about.  In the world of presidential politics, however, two-thirds approval means you’re a big winner.

But which number do you believe?  Where’s the truth?  And if you find it, can you handle the truth?  I went looking.

The difference in the polls, of course, is partially a result of the way they were conducted: who was asked, when they were asked, what was asked and how the questions were asked.

All three polls strove for broad geographic diversity, but beyond that there are noticeable differences.
 
The New York Times poll, conducted with CBS, surveyed 973 adults, starting with residential landline lists and supplementing it by calling random landlines and cellphones.  Most unusually, the Times over-sampled black respondents (a major topic of the survey was race), by calling homes where a self-identified black respondent had been interviewed in the previous nine months; all blacks were then weighted back to proper proportions.  In theory, according to the survey’s fine print, the margin of error for the survey is three percentage points in either direction from what a survey of the entire country would yield, while for the 212 blacks, the error is plus or minus seven points.

The Washington Times (which I had stumbled upon online) claimed to be quoting a poll by Gallup, an organization known (unlike the others here) for its historical and ongoing commitment to objectivity.  Trouble is, a check of the Gallup site reveals that its latest poll gives Obama a 65% approval rating, which is “solidly positive, although not extraordinary in historical terms.”  According to Gallup, Obama’s lowest rating to date has been 61%–in early April.  So where did that 56% the Washington Times printed come from?  An innocent transposition or a little creative writing?

As for The Wall Street Journal’s numbers, they came from a joint effort with NBC News, which explains, “The Wall Street Journal/NBC News poll was based on nationwide telephone interviews of 1,005 adults, including a sample of 100 interviews with people who only use a cell phone. It was conducted April 23-26 by the polling organizations of Peter D. Hart  (Dem.) and Bill McInturff (Rep.) and has a margin of error of plus or minus 3.1 percentage points for the full sample.”

I put it all together, and, accounting for margins of error,  I come out with a theoretical approval rating of between 56% and 74%.  The only certainty is that the greater the number of voices, the more diverse the opinions.

Earlier this week I referred to Joshua Slocum, the first man to sail alone around the world and today I’ll do it again.  Mr. Slocum took only one old tin clock as a navigational device on his voyage, knowing that the presence of more would only be confusing.  When it comes to polls, however, I think hearing from other voices can be helpful, provided that we bear in mind the relative “truthfulness” of these voices.

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My Two Cents on Chrysler

Chrysler will now be run by the U.S. government, Fiat and the United Auto Workers Union.  It’s hard to imagine a worse combination.  Maybe they could add some Russians.  The Chinese auto industry is going to steamroll these guys.

Now on to coffee.

I don’t drink coffee; my last cup was roughly 23 years ago.  And I rarely drink tea.  One day I realized I never really enjoyed either one, and I didn’t need them to wake up.  So I just stopped.  At our daily company coffee breaks I drink water.  In fact, I drink water all day, switching to more relaxing beverages in the evening.

But that doesn’t mean I don’t appreciate the power coffee has in our society, both in the U.S. and the whole world.

Coffee is the world’s most popular beverage, and ranks second only to petroleum in terms of dollars traded worldwide.  And investors who spot new trends in the coffee industry early and take advantage of these opportunities can make big money.

The biggest example of this is Starbucks (SBUX), the once-small Seattle company that’s now raking in $10 billion a year from some 11,000 stores in the U.S. and 5,000 more in 48 other countries.  Starbucks came public in 1992, and if you had bought $10,000 of SBUX stock a year later–after it had already had a good advance–today you would have $91,000.

But if you were really smart and sold two years ago, before the economy tanked, you would have walked away with $258,000.  

Starbucks is still a growth company.  But revenue growth slowed to 10% last year, while expenses didn’t slow as fast.  So earnings suffered.  And when earnings fail to meet expectations, growth stock investors tend to jump ship, which is why SBUX fell from 40 to 7 over the past two years.

The stock is recovering now (it’s up to 14), but it will never be what it was before.  The company is simply too large, and the stock too heavily owned.  Also, there’s too much technical overhead; as the stock recovers from here, it will continually be weighed down by the selling of investors who bought earlier and are selling to “get out even.”

Plus, the world is changing.  Money is tighter, and people are finding new ways to get a good cup of coffee for a lot less than the four dollars Starbucks’ charges.

Which brings me to Green Mountain Coffee Roasters, the Vermont company whose stock (GMCR) gained 37% yesterday, after releasing a dynamite earnings report.
 
Green Mountain, headquartered in Vermont, has grown its business for every year of the past decade by selling its coffee to distributors for offices, hotels, retailers, department stores and club stores.  Today it sells more than 100 varieties of coffee, as well as hot cocoa and tea.  Last year, revenues hit $500 million, making the company 5% the size of Starbucks.

Most important, the company has seen no slowdown in its business in the pasty year.  In fact, it’s seen acceleration.  And the reason is Keurig.  If you know it, you understand.  And if you don’t know it, you will.

Keurig, basically, is a single-serve coffeemaker that uses disposable pre-packed K-Cups.  Developed for the commercial market, it’s now fast infiltrating the home market.

Interestingly, the name Keurig is derived from the Dutch word for excellence, but the company is no more Dutch than Haagen-Dazs is Scandinavian.  Keurig was born in Massachusetts and nurtured to maturity by entrepreneur Nicholas Lazaris.

Green Mountain Coffee Roasters bought Keurig in 2006 for about $104 million, and since then the combination of Green Mountain Coffee and Keurig brewing systems has been unstoppable.  In the past year, particularly, the global recession has made a home-brewed cup of coffee (made for a lot less than a dollar), a lot more attractive to people than that $4 cup of Starbucks coffee!

I also think the earth-friendly Vermont image is becoming more fashionable now than the slightly passé Seattle image, based on computers and music.

Growth stories like this have been rare in recent months, so investors have been buying GMCR steadily.  As a result, it’s earned a recommendation in Cabot Top Ten Report four times so far this year, in January, February, March and April.

On these occasions, editor Michael Cintolo wrote, “While Starbucks continues to cut back after years of (over)expansion–another 1,000 workers are rumored to be on the chopping block–little Green Mountain Coffee remains in rapid growth mode. … An office or consumer that buys a Keurig machine becomes a steady customer, and the resulting boost in business has made Green Mountain a hot item. Strict attention to cost control has also helped the bottom line, resulting in a recession-defying 14% gain in earnings (growth should accelerate from here) on a 56% jump in revenue in Q4. With just 99 institutional investors on board, Green Mountain has enormous room to grow. … Green Mountain Coffee has a big, mass market story that could take it far… In the fourth quarter, the company shipped a huge 711,000 Keurig brewers, more than double the year-ago figure, while 357 million (!) K-Cup packs were shipped, up 55%. Going forward, the sky’s the limit, as most everyone loves their coffee, and having a personal brewer and a choice of dozens of high-quality coffee, tea and cocoa choices makes sense.  It’s not a highly-liquid stock, but the story is very attractive.”

Those buy recommendations were made as the stock worked its way from 40 to 51, giving anyone interested in the stock plenty of time to get on board.

And then yesterday it jumped 37% to 72, when the company thrilled analysts by reporting revenue growth of 60% and earnings growth of 117%.

During the quarter, the company sold 432 million K-Cup portion packs, up 62% over the year-ago quarter.  Even better, it sold 479,000 Keurig brewers, up 148% over the year-ago quarter.  And all those coffee-makers are now going to need coffee!

Putting icing on the cake, the company announced its coffee and Keurig brewers would now be sold at Wal-Mart, making it a true mass-market product!

So, I think it’s a great investment idea, and I don’t even drink coffee.  But I do buy a lot.  In fact, we’ve had a Keurig coffeemaker in our Cabot office for several years, and everybody loves it.

Our stock of K-Cups currently includes Hazelnut, French Roast, Vermont Country, Rainforest Espresso, Spring Revival, Irish Cream, Colombian La Vereda, French Vanilla and something called Jet Fuel.  

I figure we pay about 47 cents per cup and I expect to be buying coffee for a very long time.
 
Yours in pursuit of wisdom and wealth,

Timothy Lutts
Publisher
Cabot Wealth Advisory

Editor’s Note: Every week, Cabot Top Ten Editor Michael Cintolo screens the market for the strongest stocks, and then narrows them down to those with the biggest potential.  He gives each stock a buy range, tells subscribers why the stock is strong, and provides follow-ups in every issue; he even highlights one stock each week as his Editor’s Choice.  

In Mike’s words, “Cabot Top Ten Report is guaranteed to highlight not a few, not some, but all of the leaders of every market cycle, because we screen for where the big money is flowing.”  If you’re tired of buying second-rate stocks and want to know what the real leaders are, you should try a no-risk trial to Cabot Top Ten Report today.

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