We recently compiled a list of the 10 Best Undervalued Stocks to Buy According to Reddit. In this article, we are going to take a look at where Starbucks Corporation (NASDAQ:SBUX) stands against the other undervalued stocks. If interested, read our recent piece on the 10 Most Undervalued Stocks to Buy for Under $20.
Retail investors often discuss their investments on platforms such as Reddit and have become a major market force in recent years. According to a report, inflows from retail investors in the stock market between 2014 and 2019 averaged around $200 million, with a peak of $730 million in 2015. The figure spiked to $1.2 billion in 2020, with daily flows reaching $1.48 billion in 2021. Over the next couple of years, the value of inflows hovered between $1-1.4 billion per day, driven by commission-free online trading platforms and stimulus payments from the government. The surge in investor inflows is also owed to the pandemic, during which low interest rates and bond purchases by the Federal Reserve pumped heavy money into the American financial system.
The year 2024 has already been a healthy year for the American stock market, driven by a strong performance by technology stocks. Tom Lee, the co-founder and head of research at Fundstrat Global Advisors, is bullish on the ongoing fiscal year and anticipates the market to triple in size by the end of the decade.
The two major factors driving Lee’s bullish projection were the global labor shortage and a surge in the population of millennials. He mentions how millennials are the largest generation shaping the economy and are set to inherit big as we approach the generational wealth transfer of at least $80 trillion. According to a report, by 2030, millennials will have five times more wealth compared to what they have today. Moreover, the past two incidents of global labor shortage led to major spikes in technology stocks, and Lee is expecting the same again this time. However, he also warns of risks that could undermine his positive outlook, including AI backfiring, global recession, and geopolitical instability.
This uncertainty about the stock market, coupled with stocks’ volatility, makes it difficult for investors to ascertain the true value of the stock they want to invest in. American billionaire hedge fund manager, Bill Ackman, in May this year, discussed the current state of value investors and acknowledged that predicting the durability of a stock is far harder than building a financial model in the world of investment. Responding to a question about the use of AI to analyze stock investments and financial markets, Ackman stated that AI platforms might help in decision-making over the short run, but there is no guarantee that they would continue working over the long run.
Value investors purchase stocks they believe have a high value but their share prices do not reflect the stock’s actual worth, aiming to benefit when the market corrects itself. If the correct stocks are picked, it can lead to hefty returns for the investors through share price performance. One way of picking out the right stocks is noticing what the hedge funds are doing. Insider Monkey regularly covers top hedge fund stocks across industries for each quarter, and you can keep up with the information by following our website and subscribing to our newsletter. One such example is the 10 Best Aerospace and Defense Stocks to Buy Now.
Methodology
We went through several threads on Reddit to identify the most talked about top undervalued stocks according to investors on the platform. After gathering a list of companies, we went through a stock screener to verify that these stocks were undervalued. Then we sorted and listed the stocks in ascending order of how frequently they were mentioned on Reddit for being undervalued. In cases where two or more stocks were level on the metric, we outranked one over the other based on hedge fund sentiment about the stocks in question. Insider Monkey’s database of 920 hedge funds for Q1 2024 was used for that purpose.
Why are we interested in the stocks that hedge funds pile into? The reason is simple: our research has shown that we can outperform the market by imitating the top stock picks of the best hedge funds. Our quarterly newsletter’s strategy selects 14 small-cap and large-cap stocks every quarter and has returned 275% since May 2014, beating its benchmark by 150 percentage points (see more details here).
A barista pouring freshly brewed coffee from an espresso machine to a cup in a bustling cafe.
Starbucks Corporation (NASDAQ:SBUX)
Investors on Reddit that consider the stock undervalued: 4
Starbucks Corporation (NASDAQ:SBUX) is the world’s largest coffee chain, with nearly 36,000 stores across 80 countries, as of 2022, with plans to increase the tally to 55,000 by 2030. The company’s powerful brand identity coupled with its pricing power offers it immense competitive advantage in the industry. However, the stock has been suffering off late, with the share price nosediving over the past year amid a drop in traffic and store sales due to the company’s stance on the Israel-Hamas conflict in the Middle East.
Another bearish case against the company is the competitiveness of the restaurant industry as a whole, because of which Starbucks Corporation (NASDAQ:SBUX) can not simply rest on its reputation, and has to keep finding ways to enhance customer experience and maintain its status as a market leader. A cause of concern for the coffee giant is the fierce competition it is facing from Luckin Coffee in China, its fastest-growing market. Luckin is already China’s biggest coffee chain, having surpassed Starbucks’ number of stores in the country in 2019.
Despite the challenges, the company remains financially strong. Its operating margin has averaged around 15% over the past decade due to its massive scale. In 2023, Starbucks had an operating cash flow of over $6 billion. In Q2 2024,, the company missed analysts’ earnings expectations, posting $0.68 against forecasts of $0.79. The management conceded during the earnings call that the results were down due to a 4% decline in store sales over the past year and a negative 11% comp growth in China.
Having said that, many believe that once the ongoing headwinds are over, the stock will rebound. Simply Wall Street recently estimated the stock to be 24% undervalued. Several analysts have reiterated their Buy rating for Starbucks Corporation (NASDAQ:SBUX), and have forecasted an average share price target of $93.30 with an upside of 17.70%. Moreover, according to Insider Monkey’s database, 69 hedge funds were bullish about the company in Q1 2024, up from 59 in Q4 2023.
Vulcan Value Partners has cited reasons to invest in Starbucks Corporation (NASDAQ:SBUX) in its first quarter 2024 investor letter:
We are pleased to have purchased Starbucks Corporation (NASDAQ:SBUX) in the first quarter. We have owned the company in the past, and it was a good investment for us. The company has strong brand recognition, global distribution, and outstanding retail real estate. The company generates robust free cash flow and has high returns on invested capital as well as a strong balance sheet. Starbucks has used its financial resources to strengthen its brand and enhance customer loyalty. Additionally, the company has continued to see attractive returns from opening new stores. Stock price volatility over the last year is likely due to management changes, disappointing short-term results, and general hesitancy about consumer spending. We believe that Starbucks’ competitive position remains intact, and its value will continue to compound over our five-year plus time horizon.
Overall SBUX ranks 6th on our list of the best undervalued stocks to buy according to Reddit. You can visit 10 Best Undervalued Stocks to Buy According to Reddit to see the other undervalued stocks that are on hedge funds’ radar. While we acknowledge the potential of SBUX as an investment, our conviction lies in the belief that AI stocks hold greater promise for delivering higher returns and doing so within a shorter timeframe. If you are looking for an AI stock that is more promising than SBUX but that trades at less than 5 times its earnings, check out our report about the cheapest AI stock.
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Disclosure: None. This article is originally published at Insider Monkey.
