What Does A $5 Cup Of Coffee Mean For Penny Stocks?

| November 12, 2012 | 0 Comments

SBUXRegular readers know I frequently use big companies as examples of how to find opportunities in small caps and penny stocks.  Despite my focus on small caps, there are important lessons to be learned from blue chips companies.

After all, many blue chips are the leaders of their industries for a reason.

That being said, we’re going to take a closer look at one of my favorite companies, Starbucks (SBUX).

Early in this month, the world’s largest coffee shop operator beat expectations on revenues, profits, and guidance.  It’s always impressive when a company beats on all three key metrics.

Even better, this past quarter has been a rough one for many major companies.  Relative to other big players, SBUX’s numbers are exceptional.

Starbucks was able to boost revenues and profits by expanding their product mix.  The stores added teas, energy drinks, juices, and more to their menu.  Plus, they introduced their own version of the single serve coffee machine called the Verismo.

Here’s the interesting part…

The coffee company is doing better than expected in a tough economy… but also during a period when coffee prices are declining.

You see, most commodity vendors (everything from coffee to oil) expect to see lower demand from consumers if they don’t adjust their product prices lower with falling commodity prices.

Think what would happen if gas prices never decreased after the price of crude oil drops by $10 a barrel.  There would be outrage among drivers.

However, coffee prices are down 35% over the last year – a significant drop.  And, SBUX is charging more than ever for their drinks.

How can they get away with it?

Simple.  The company isn’t seeing a slowdown in demand.  In fact, as I just mentioned, revenues are actually increasing.

You see, SBUX has one of the most valuable assets a company can have… an unrivaled brand name.

Even with the struggling economy, lines are still out of the door at many SBUX stores.  Consumers just don’t want to give up their triple grandé caramel mochas with extra whip.  (That’s at least a $5 drink.)

Not to mention, it’s something of a status symbol to walk into your office carrying a cup with the SBUX logo proudly displayed.  That’s the powerful brand Starbucks has created.

That being said, how can we use this example to find better penny stocks?

Once again, it’s all about the brand.

Despite being smaller companies, many penny stocks still develop strong brand names.  The stronger the brand, the better the company will be able to weather slower economic periods.

So keep an eye out for small companies with popular products.  Keep in mind, there are plenty of penny stock retailers out there to choose from.

Yours in profit,

Gordon Lewis

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