Selling High Growth Names Into Tough Comps
- Posted by Leigh Drogen
- on July 27th, 2012
I won’t go rummaging through my StockTwits steam trying to find the quotes because that would take forever, but I want to highlight why I was very bearish on Starbucks going into the print, and have been for about 3 weeks now. I think it contains an important lesson for trend/momentum traders, and those who love the long term story of Starbucks, or any other high growth company for that matter.
Just a side note, I know this feature won’t move important metrics for either Twitter or StockTwits, but I would really love it if one of them allowed for filtering on a stream.
The bottom of this chart shows the YOY revenue growth (bottom row) of Starbucks. The lesson here is in comp analysis, and what happens when growth slows.
As you can see, pullbacks along this chart correspond very directly to earnings releases in which YOY revenue growth slowed. Why? Because investors are dumb and panicky people. Starbucks has traded at a considerable growth multiple the whole way up, and when that’s the case investors shoot first and ask questions later when they see slowing YOY growth, in some cases where there isn’t a cyclical pattern to earnings they will use sequential growth.
In the September quarter of 2010 Starbucks grew YOY revenue at a 17% clip, huge! After a max growth rate of 9% of the previous few years, that was an outlier quarter. So when Starbucks was ready to report earnings for the September quarter of 2011, it wasn’t hard to imagine that they weren’t going to match that growth rate. And low and behold the stock got crushed when it reported 7% YOY growth against that very difficult comp.
Investors don’t give the company a pass for being up against a tough comp from a quarter when they blew it out of the water. They see slowing growth, end of story.
So why was I bearish the last few weeks going into this quarter, and will continue to be bearish on Starbucks for the next 3? Look at the growth rate from the June quarter of 2011, 12%. The second highest in several years up against a 9% YOY growth rate the year before. There’s a good reason Starbucks has gone on such a great run, those are outstanding numbers for a food chain of their size. But can they continue to top that, a requisite for the multiple they had, no.
Up against a 12% comp the year before, and the last two quarters where they grew 16% and 15% respectively, it was abundantly obvious that they were going to see slower growth this quarter. And they did, at 13%. Still a great report, don’t get me wrong, but not for their multiple, they needed 16% at least to maintain in.
How about going forward? Next quarter they are up against a weak 7% comp which could provide some support to the stock, but they they get up against that 16% and 15% number which I guarantee they won’t match. So in the face of slowing growth and a multiple that is going to be cut, why would I be long this stock? Yes, the long term story is great, but the stock isn’t going anywhere right now, you have to play the odds.
When companies that you believe can’t grow over a certain rate get up against really tough comps from a big growth cycle, you don’t want to be heavily long. They are likely to see multiple contraction caused by investors like me selling as they see slower growth taking place. This is the way the market works, don’t fight it or justify holding the stock because you love the company’s long term plan. You never know when a few quarters of slower growth turn into Research In Motion or Netflix.
Play the odds.
Full Disclosure: Nothing on this site should ever be considered to be advice, research or an invitation to buy or sell any securities, please see the Disclaimer page for a full disclaimer.
blog comments powered by Disqus
Leigh Drogen is the founder and chief investment officer of Surfview Capital, LLC, a New York based investment management firm employing an intermediate term long/short momentum strategy. More »
- The Panic Is Relatively Confined
- School For Bums
- Estimize Raises Series B Led By WorldQuant Ventures
- Will Automation Make Africa The Lost Continent
- My 2015 Stock Picks and Big Trends
- Is Israel In Danger of Being Destroyed?
- Review Of My 2014 Picks and Trends
- The Most Powerful 27 Year Old In Finance?
- You Won’t Believe What This Asshole Said About Yo
- Deltix Publishes Quant Strategy Using Estimize Data Producing 28.5% Cumulative Market Neutral Returns
- August 2015
- April 2015
- January 2015
- December 2014
- July 2014
- June 2014
- December 2013
- November 2013
- October 2013
- September 2013
- August 2013
- July 2013
- June 2013
- May 2013
- April 2013
- March 2013
- February 2013
- January 2013
- December 2012
- November 2012
- October 2012
- September 2012
- August 2012
- July 2012
- June 2012
- May 2012
- April 2012
- March 2012
- February 2012
- January 2012
- December 2011
- November 2011
- October 2011
- September 2011
- August 2011
- July 2011