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November 04, 2011

Starbucks Does Well By Doing Good

Starbucks reported earnings yesterday and profits were up 29% in the fourth quarter. The company bested Dunkin Donuts in same-store sales as well. Theirs rose 10% while its main rival's rose just 6%. The company credits its recent success with brand loyalty among its customers.

Bucks Jobs by Ben Taylor
source: Benjamin Taylor

I for one have been a loyal customer of Starbucks for many years. I also admired Starbuck's way of doing business. I always thought of the company as well run. However, during those years, Starbucks's stock remained at lofty prices and it wasn't until the Great Recession that the company's stock became reasonably priced. Since we bought it for the Core Portfolio at the end of 2008, it has returned nearly 336% for us and become our largest holding (as of 11/3/2011).


source: mint.com

I believe one of the reasons Starbucks can generate loyalty amongst its customers is the social responsibility the company exhibits. Customers (and investors) want to be associated with a company they can feel good about. I also believe that companies that act responsibly also make good investments. Although Brick Financial does not engage in Socially Responsible Investing (SRI) as it is commonly known, I look for companies that have certain characteristics and these companies are typically good citizens. There has been some research to suggest SRI does in many cases outpace general market investing. The authors find:

In terms of firm level performance, we compare regular funds with replicating portfolios that have been adjusted for unethical companies according to a norm-based screening method. We find that the replicating portfolios perform better than the regular funds, suggesting that certain socially responsible practices affect fund performance positively.

Again, if a company does good, it is likely to be doing well. And vice versa. It is also likely to produce loyal customers like myself. As an example, I purchased my Let's Create Jobs For USA bracelet this morning and will be wearing it proudly.


Disclosure: At the time of this writing, I and the clients of Brick Financial Management, LLC owned shares of Starbucks (SBUX).

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August 16, 2011

The Wealth Gap: The False Promise of Home Ownership

The Wealth Gap
source: Nick Bastian

The Pew Study reports a stark contrast in the wealth of households by racial group. The median wealth of white households is 20 times that of black households. The study very quickly points to differences in home ownership (non-investment real estate) as the main culprit in explaining the differences in wealth. (Because blacks and Hispanics have very similar financial characteristics and those characteristics highly contrast those of whites and Asians, I will use the stats from the black and white populations for these illustrations.) For instance:

  • Only 46% of black households owned their own home, while
  • Among white households, 74% owned a home.

So right off we can see black households far behind in the primary asset that contributes to wealth – a home. Owning a home is a pervasive and deep seeded American dream. It has been promoted as the sure way to wealth, by our government, our financial advisors, our ministers and any number of late night infomercials. And the above statistic seems to support this idea. Own a home, get rich.

But I am here to say this idea is misguided. It represents one of the biggest fallacies of wealth accumulation in existence. Home ownership is not a panacea. In fact, if pursued to the exclusion of other assets, especially financial assets, it can be an albatross.

To explain what I mean, let’s look deeper into the stats and include those from wealthy households regardless of race. For blacks and whites alike, home equity made up the lion’s share of net worth. For blacks however, owning this asset (or not owning it), proved much more contributory to the rise, fall or existence of net worth. For example:

  • For black households that owned a home, home equity made up 56% of its net worth.
  • For white households that owned a home, home equity made up 38% of its net worth.

White households tend to be more diversified than black households. Thus they were able to better withstand the downturn in the real estate market experienced of the last few years. In fact, many black households bought at the peak of the real estate bubble during the days of 110% financing and easy credit. Another study conducted by Pew tells us that 35% of black home owners are under water on their mortgage, meaning they owe more on their mortgage than their home is worth. “Only” 18% of white home owners are in this situation.

Being a little more diversified (not too much) protects wealth. Something the very wealthy, regardless of race, have figured out. According to the latest Survey of Consumer Finances:

  • Of households in the top 5 percent of wealth (usually $1.5 million or more in net worth), 98% own their own home, however, home equity makes up only 15% of their net worth.

Blacks who are financially upwardly mobile, for lack of a better term, have caught on that home ownership is a great tool for wealth accumulation. But somehow, the forest was missed for the trees. Home ownership if all goes well can be a financial benefit, but in comparison to other assets available in the marketplace, real estate falls way way short on delivering functional (read: spendable) wealth. That usually comes in the form of stock, bonds, cash and business ownership. I will explore those differences in a later post. The next post however, I will look at the differences among racial groups in unsecured debts and ownership of other tangible assets like cars.


Market:

"Tax My Fortune! Please! Why Warren Buffett Should Volunteer to Pay Higher Taxes" by Daniel Gross, Contrary Indicator; Yahoo! Finance

Paying a few billion dollars in taxes that it isn't required to would allow General Electric, and any other company that follows suit, to do what most Fortune 500 firms haven't been able to do since the 1990s: claim the moral high ground. Just as a self-taxing Buffett would, a self-taxing company would garner a huge amount of publicity and positive reputation-building.

"That market plunge was so last week" by Bloomberg; Pensions and Investments


Portfolio:

"Coffee Wars: Is Dunkin’ Donuts More Valuable Than Starbucks?" by Stacy Curtain, Daily Ticker; Yahoo Finance

"Dunkin' Launches K-Cups; Starbucks Soon to Follow" by Karlene Lukovitz; Mediapost

"Starbucks CEO to DC: You've been cut off" by Charles Riley: CNN Money


Life:

"7 Tips for Writing E-mails That Won't Get Deleted" by Jill Konrath; Inc Magazine

"How to Talk with Your Children About Sex" by Planned Parenthood


"I ain't talking 'bout rich, I'm talking 'bout wealth. Wealth is passed down from generation to generation. You can't get rid of wealth. Rich is some shit you can lose with a crazy summer and a drug habit." - Chris Rock

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August 09, 2011

The Debt Cieling, The Tea Party and Fuzzy Math

Father and daughter change the oil
source: Gamma Man

The Debt Cieling, The Tea Party and Fuzzy Math

"Where the tea party is wrong" by Jeanne Sahadi; Cnn Money

"Reactions to the Debt Deal" by Justin Lahart, Wall Street Journal

I could end the deficit in five minutes. You just pass a law that says that anytime there is a deficit of more than three percent of GDP all sitting members of congress are ineligible for reelection. - Warren Buffett

"'46% in U.S. don't pay taxes' only half the story" by Joe Garofoli; San Francisco Chronicle

"Spending AND Taxes Got Us Into This Mess, And Only BOTH Can Get Us Out" by Chad Brand; Peridot Capitalist

To counter one of the most common rebuttals to this conclusion (that taxes are too high) consider that federal taxes today are at their lowest point since 1950 (again, as a percentage of GDP). In order to balance the budget, we need to close an annual deficit of $1.4 trillion, the product of $3.6 trillion in spending versus just $2.2 trillion in tax collections. If we do not raise taxes at all, government spending would have to be cut by that $1.4 trillion figure, which would be a cut of 40% (and is impossible).

Portfolio:

"Has Starbucks had enough of laptop loungers?" by Chris Matyszczyk; CNET News


Life:

"The Six Levels of Trust" by Carol Kinsey Goman; Forbes

"Jay-Z and Kanye West's 'Watch the Throne': Track-by-Track Review" by Erika Ramirez; Billboard

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January 05, 2009

"The Third Pig" On Reuters, Yahoo Finance and Others

The Third Pig

Articles that appear on The Third Pig occasionally appear on the Seeking Alpha website and are regularly picked up by the general financial media outlets including Yahoo Finance, Reuters and other financial blogs. I have listed some of the latest entries and other locations they can be found:

Asset Allocation in 2009: Best to Go with the Devil You Know at:
Yahoo Finance: http://finance.yahoo.com/q/h?s=SBUX and http://finance.yahoo.com/q/b?s=BRK-A
Fav.or.it: http://fav.or.it/post/953406/asset-allocation-in-2009-best-to-go-with-the-devil-you-know

Coach: Luxury on the Cheap at:
Guru Focus: http://www.gurufocus.com/forum/read.php?2,42620
Fav.or.it: http://fav.or.it/post/929527/coach-luxury-on-the-cheap

Five Things to Be Thankful for in This Market at:
Reuters: http://www.reuters.com/finance/stocks/marketViews?symbol=COH.N
Yahoo Finance: http://finance.yahoo.com/q/b?s=COH&t=2008-12-15T03:55:28-05:00

GM Bailout Would Be Agony For Taxpayers at:
Yahoo Finance: http://biz.yahoo.com/ic/news/330.html?time=1226885400 

Obamanomics and the Stock Market at:
Stock Shoot: http://stockshoot.com/content/view/6602 

Buffett and Cramer Agree: It’s Time to Buy Stocks at:
AOL Finance in the Headlines area: http://finance.aol.com/related/berkshire-hathaway-inc-cl-b/brk.b/NYS?topic=144012971&tab=3 

Greed, When Others Are Fearful, Is Good at:
Wall Street Oasis: http://www.wallstreetoasis.com/newswire/greed-when-others-are-fearful-is-good

If you would like to share some of the above articles with your friends, family or associates just click any one of the icons below for the various websites including ShareThis, Digg.com and Facebook. Here is to a wonderful 2009 in the market.

Disclosure: none

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January 02, 2009

Best To Go With The Devil You Know

The stock market ended the year of 2008 posting one of its worst annual price performances ever. The Standard & Poor's 500 index dropped 38.5% for the year marking its worst performance since 1937’s 39% drop in the index. In fact it was the first time the index saw a 30% or more drop in price in those 71 years. So if you survived this year, give yourself a pat on the back.

Investors over the past year made many wrong moves, paralyzed by fear, they drove down stock market prices to unreasonable levels. One bright spot is patient investors could invest in stocks very cheaply. Valuation levels had not been at those levels since the early 1980’s. Although the S&P 500 has advanced more than 20% from its low of November 20th, there remain bargains to be had.  

With so many bargains to choose from, some investors may experience paralysis because of greed. Which stock does one pick? In such an instance, it is best to invoke the spirit of Charles Munger, co-chairman of Berkshire Hathaway. In an Outstanding Investor Digest article some years back Munger was quoted as saying:

“For an ordinary individual, the best thing you already have should be your measuring stick. If the new thing isn’t better than what you already know is available then it hasn’t met your threshold. This screens out 99 percent of what you see.”

Although I picked up a few new positions for myself and my clients’ portfolios, in following Munger’s advice I found that the positions already in the portfolios were of solid companies that were similarly beat down as the market. Every nook and crannie of the market was hurt this year. It couldn't be avoided. And the potential of being hurt further is still present. However, when choosing where to allocate funds, sometimes it is best to go with "the devil you know".

Instead of scouring the investment universe for the new thing, I simply averaged down. The following chart marks the return of a few positions from the beginning of the year to the S&P 500’s low on November 20th and then the return to the end of the year from that November date compared to the market’s return.

 

Although as a group the stock of these companies declined to a similar degree as the market, their rebound so far as been nearly 50% greater. Although it is too soon to say, I believe superior companies will bounce back to a greater degree than the average stock. I think this is what we are seeing in the chart above.

Disclosure: I and the clients of Brick Financial Management, LLC owned shares in all the companies mentioned in this post at the time of this writing. But positions may change at any time.

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April 25, 2008

Contents NOT Hot at Starbucks

StarbucksThe shares of coffee maven Starbucks' (SBUX) took a 10% tumble Thursday after the company announced it was lowering earnings forecasts for the remainder of the year. Howard Schultz, the company's CEO, cited "...The current economic environment is the weakest in our company's history, marked by lower home values, and rising costs for energy, food and other products that are directly impacting our customers." Schultz also mentioned the California and Florida markets, which make up 32% of domestic retail revenues have been especially impacted by the downturn in the housing market. Thus he/the company draws a connection between the struggles consumers are having in the housing market with a downturn in Starbucks' traffic in those states.

While I personally cannot be certain there isn't a direct connection between the housing crisis and lightened traffic at Starbucks's stores, I'm skeptical. If folks are making the choice between their daily java fix and making a mortgage payment, then times are worse than I thought. If there is any diminished traffic at Starbucks' stores it is more likely a result of internal missteps than outside economic forces.

An outside force I am convinced is not to blame for Starbucks' troubles is headwind created by the success of the coffee products from McDonald's or Dunkin' Donuts. Each of these companies does something well - McDonald's makes Egg McMuffins (delicious), Dunkin' makes, well donuts (also delicious) and Starbucks makes high-end specialty coffee. And the customers of each of these companies are as unique. McDonald's customers want a drive-thru window. Dunkin' Donuts' customers want sugar. And Starbucks customers want a place they can sit and enjoy a conversation, a newspaper or search the web. So I'm not troubled by competition. (Read my friend and fellow Starbucksian, Wayne E. Pollard's take on the subject at the Huffington Post.)

There were some encouraging words from the press release. Schultz committed to cutting costs and refocusing the company's efforts on making the best coffee in the world. Today, the company announced it was stepping back from its efforts in entertainment as well. If these actions reignite the company's growth, this period would have marked a prime and rare buying in opportunity.

Disclosure: I and the clients of Brick Financial Management, LLC owned shares of Starbucks at the time of this writing.

 

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May 03, 2006

Please DON'T See "Akeelah and the Bee"!

I saw a great movie this past weekend. Akeelah and the Bee, is about an gifted 11 year-old whom finds her way to the National Spelling Bee Championship. Along the way she finds that she has people in her corner who help her conquer her demons and want to see her succeed.

I liked the movie because it addressed a little known phenomenon in the African-American community in which academic achievement is considered a white people thing. There were several references to large and complicated words as being white words. Akeelah is torn between fitting in and reaching her true potential. I won’t give away the ending but let me provide a hint. It’s an inspirational story with a moral and a happy ending.

Even though I enjoyed the movie, the plot wasn’t the most interesting facet of Akeelah. What most interested me about the movie was the way in which it was marketed. You didn’t see the typical deluge of trailers and movie posters plastered every which where. Instead, what you saw were green and yellow neon coasters, coffee sleeves, and signs placed strategically around your local Starbucks [SBUX].

Long the number one purveyor of your favorite java concoction, Starbucks has been expanding its reach into other, seemingly unrelated businesses. The company has seen success in satellite radio, production and sales of CDs, and is now getting into the marketing of movies. Recognizing its power as a place where “communities meet” and “word-of-mouth” is created, Starbucks is making an effort in earnest to capitalize on that unique position.

As a frequent customer of Starbucks [Full disclosure: I’m currently drinking a caramel macchiato and writing this blog in a New Jersey based Starbucks. So I’m a little biased toward the company.] I’m all for the long-term success of the chain in these non-caffeinated aspects of its business. I emphasized long-term because I need this company to slip up somehow. The business is so excellent and execution so on point that the market has rarely priced the stock to a level where I felt comfortable buying it. [Click graph to view a larger image.]



Akeelah is a great movie. Critics (namely my favorites Ebert & Roeper) are already calling this movie an Oscar contender. Which is actually a little disappointing. I’m glad Starbucks and Ken Lombard, the head of Starbucks Entertainment, picked a great movie – one that falls right into line with their culture. I’m confident they will continue to pick great films. But can’t they mess up at least once so the market can depress the stock? I want to buy!

Maybe this weekend’s box-office is a good sign as Akeelah came in eigth-place. Well behind the critically unacclaimed [Two thumbs down from E&R] Robin Williams’ film RV. I hope this is the slip up I’ve been waiting for. As a value investor I wait for disappointing news that is temporary and then wait to see how the stock reacts. Akeelah is a great movie (and a great product) that I’m hopeful will not do well. This would be a perfect example of a good company with a temporary setback. If that happens let’s hope that the manic depressive market punishes the stock, and at that point I’ll probably be a buyer.

We’ll see what the stock does after today’s conference call.

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About Brick Financial Management, LLC

Blogged by Brick Financial

51 JFK Pkwy, 1st Fl. West
Short Hills, NJ 07078
973-486-9860
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Brick Financial Management, LLC is a Registered Investment Advisor specializing in providing investment management services to individuals, families, organizations and institutions. We implement highly focused stock, bond, and balanced portfolios using an investment approach commonly referred to as value investing. Disclosure

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