Coffee in Wine Country

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This past weekend my wife Carrie and I were fortunate enough to sneak away from Vermont and travel to the west coast to spend a few days with family members. The trip was great, and a few days in Washington State's wine country was just what the doctor ordered. One of the more exciting parts of the trip didn't happen at a winery however, it came when we visited a Starbucks (NASDAQ: SBUX) in Seattle.

Carrie and I were just discussing the history of Starbucks when none other than Starbucks CEO and Chairman Howard Shultz strolled by. Now Mr. Shultz is an intriguing guy for several reasons, beyond just the fact that his leadership has grown Starbucks from a small coffee chain to an international status symbol. His rise to become CEO of Starbucks is in many ways an example of the American dream – of growing from rags to riches. Despite his inflammatory remarks which at times earn him the criticism of the media, there is no doubt the man has been successful. 

By the way, I own shares of Starbucks in my personal account, and the company's efforts over the last year to organize its real estate investments and focus on overseas growth (including China) are helping to propel the stock price higher.

***Shultz grew up in Brooklyn, NY and came from a family without a lot of money. A great athlete in high school, he was able to earn a scholarship to Northern Michigan University and became the first in his family to graduate from college.

He then went on to work for Hammerplast, a Swedish drip coffee manufacturer and subsequently joined Starbucks as the Director of Marketing in 1982. On a trip to Italy he became enthralled with the way in which Italian coffee shops were the gathering places for people to share life experiences over a cup of espresso. He tried to bring this model back to Seattle but when management put the kaibosh on it Shultz left Starbucks to start his own coffee shop, named Il Giornale. My Italian is not great, but I believe this translates to 'the news', an apt name for a coffee bar inspired by Italy's social gathering places. The year was 1985.

But Shultz didn't forget about Starbucks, and two years later in 1987 he bought the small chain. Management had decided to focus on growing a small coffee and tea retailer that had been purchased in 1984. The name of that company was Peet's Coffee and Tea (NASDAQ: PEET), a company we've followed here in Small Cap Investor Daily. 

As they say, the rest is history. Starbucks went public in 1992 and Peet's Coffee and Tea years later in 2001. Since the day Shultz took Starbucks over, the outperformance of Shultz's coffee-bar model and company owned real estate has trounced the competition. Starbuck's Friday closing price of $27.26 represents a 3,969% increase over its June 26, 1992 share price, the first day it was public.

In comparison, Friday's closing price for Peet's Coffee and Tea of $40.19 is 208% greater than its closing price after the first day of being public on January 26, 2001. That's still not a bad return for shareholders after the last nine and a half years, but clearly the growth of Starbucks under Shultz since 1987 has been greater. It is both a great story of an American entrepreneur, and of a small-cap stock that has earned shareholders big profits on its way to becoming a $5 billion company.

***On a different note, I read an intriguing article in the Wall Street Journal over the weekend. The article covered an indicator that Ned Davis Research has put together that quantifies the performance of the stock market directly after "the percentage of common stocks trading above their 50-day moving averages rises above 90%". 

It appears that whenever this indicator occurs, we should be buying stocks. It has only been generated 12 times since 1967, and the last two have occurred since March 2009. According to the research, the worst performance (as measured by the S&P 500) after this indicator has been a 0.4% gain in the S&P 500 over the next quarter. Remember, that's the worst performance. The average performance over the next quarter has been 8.2%, and the best performance over the next quarter has been 13.7%. Results over the next month, six months, and year are all similarly positive.

The bottom line of this research is that if history repeats itself, stocks should continue to steadily rise over the next year. In this environment, we should expect small cap stocks to outperform large-caps since they traditionally do so when the market is rallying.

But we still need to be cautious, given the rapid rise of the market since the March 2009 lows. And that means buying only best of breed stocks. One way you can find the best small cap stocks to invest in and beat Wall Street is to sign up for a trial-subscription to Small Cap Investor PRO.

If you're serious about beating Wall Street at the investment game and want more of my top ideas, I encourage you to try my Small Cap Investor PRO service.  Just click here to start your trial membership today. You can preview the service for 30-days at absolutely no risk, and I offer a money back guarantee.

Not every small-cap stock is going to thrive like Starbucks has with Howard Shultz at the helm. But there are tons of entrepreneurs out there leading companies just like his, and they represent great investment opportunities for investors interested in owning a part of the American dream.