Starbucks (SBUX): A Good Contrarian Investment

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It’s been a tough run for contrarians. Badly beaten down companies facing overwhelmingly bearish negative market sentiment have continued to weaken: for now, the bearish masses have been right.

Part of the problem is that many of the financials that seemed cheap suffered from opaque accounting and a lack of transparency. But now there’s at least one big contrarian stock that may be poised deliver some real value: Starbucks (SBUX).

As Jon Ogg reported last week, Nelson Peltz divested his less than 1% stake in the company and, BusinessWeek reports on similar dumping at Fidelity and Maverick Capital. Selling like that hardly inspires confidence but, according to one Piper Jaffray analyst, "It’s not that the company isn’t working hard to turn things around or isn’t focused. It’s just that the turnaround is going to take a lot longer than people originally anticipated."

If that’s the case, the stock could be an attractive buy for long-term oriented investors. Problems like overly-rapid expansion and smelly breakfast sandwiches aside, Starbucks still enjoys an enviable brand position that should strengthen as Howard Schultz refocuses the company on its core strength: selling coffee. And the company has only scratched the surface of its growth opportunities overseas.

The stock is now trading lower than it was when Schultz returned in January — a move that was universally praised as the beginning of better times for the company.

With a strong balance sheet and sound long-term prospects combined with hugely bearish sentiment, Starbucks looks like a classic contrarian bet — much the way the McDonald’s (MCD) was back in early 2003 when it traded below $15 per share. Now it stands at $62,

Zac Bissonnette

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