By JACK HOUGH
Starbucks has been the subject of punch lines about chain store ubiquity at least since the summer of 1998, when The Onion, a satirical newspaper, ran a headline about the opening of a new Starbucks inside the restroom of an existing one. Shares have since gone from hitting new highs to hitting much higher ones, a plunge during the Great Recession notwithstanding. Investors who held straight through have made about five times their money -- not bad for a chain that was already everywhere.
Of course, Starbucks wasn't everywhere back then. It has since opened thousands of stores in the U.S. and abroad (the tiny Caribbean island of Curacao just got its first), and it has learned how to push more beans and brewed coffee by teaming up with grocers and fast-food chains.
If the world is finally saturated with Starbucks coffee, it isn't showing. Its quarterly sales recently jumped 9 percent, not counting the contribution of recently opened stores.
The lesson for investors: Sometimes the next big thing is the current big thing, and there's nothing wrong with buying a stock that's trading higher than ever. In fact, all else held equal, new highs are a promising sign. Stocks reaching them tend to beat the market in subsequent years, according to research by Thomas George at the University of Houston and Hwang Chuan Yang at Singapore's Nanyang Technological University.
Certainly, not all highfliers are good buys. Some are too expensive. Others are at risk of slowing down. For stock investors, it's increasingly important to be able to predict which winners will keep winning, because the stock market is closer to an all-time high than it might seem. Standard & Poor's 500-stock index needs to climb about 16 percent from its recent level to retake its October 2007 high. But it weights companies by their stock market values, so the decline of a handful of giant banks has held back the S&P 500's overall returns. Most stock investors weight their holdings more or less equally, not by market value; hence, a better representation of the choices they face is the S&P 500 Equal Weight index. It's only about 3 percent away from hitting a new high.
To buy high and sell higher, forget knowing which companies seem to have room to expand. Clever managers make room. What matters is the return companies earn on the capital they invest. Starbucks has produced a return on invested capital of about 20 percent, on average, over the past five years, and greater than 25 percent over the past year. Returns that strong suggest management isn't nearly out of ideas on how to sling more lattes.
Back In the High Life Again
The S&P 500 must climb 16 percent to reach its October 2007 peak hit before the global financial crisis, but some pockets of the market have climbed back to the top.
The S&P SmallCap 600 index reached a new high in February. Small-company stocks tend to outperform large-company ones over long time periods, studies show.
The consumer staples sector of the S&P 500 rose to a record level near the end of 2011, driven by demand for steady stocks.
All Things Equal
The S&P 500 Equal Weight index was recently just 3 percent away from the high it hit in May 2011. It has beaten the standard 500 index, which weights companies by market value, by close to two percentage points a year during the past two decades.
Second, look for firms with the financial capacity to expand. S&P 500 companies are clutching record amounts of cash. Some prosperous firms borrow to take advantage of low interest rates, so that's not always a good indication; watch for those that have plentiful free cash coming in.
Third, of course, is a reasonable valuation. Starbucks shares fetch a fully caffeinated 27 times projected earnings, versus a median of about 15 times for S&P 500 companies. The firms listed below are less expensive relative to profits and bring in plenty of free cash. Each recently hit an all-time-high stock price, but each also seems to have plenty of good growth left, judging by the high returns on invested capital.
Despite the depressed housing market, Bed Bath & Beyond (BBBY)
Asked in November why he bought IBM (IBM)