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Re: SSP post# 2

Wednesday, 04/16/2008 12:51:38 PM

Wednesday, April 16, 2008 12:51:38 PM

Post# of 80
This might help develop Canon Law:

Following the herd Sears and Starbucks offer case study in gun shy investing.

June 28, 2002: 6:20 PM EDT

By Adam Lashinsky, CNN/Money contributing writer

PALO ALTO, Calif. (CNN/Money) – Investors famously want to worship at the Church of What's Working Now.

Beaten up by past brushes with religion, they rush to put their money in stocks that have done well for others. History suggests this runs counter to common sense, but the temptation's real. Shares in two good companies with hottish stocks –Sears and Starbucks – offer the latest examples.

Start with Sears (S: Research, Estimates), a perennial doormat of the retail industry that's actually shown signs of life these past two years. This year, Sears is up an unbelievable 15 percent, compared with a 14 percent decline so far for the S&P 500 index. The retailer is profitable, its earnings are growing, and its shares are benefiting from the overall distaste for technology stocks and other troubled sectors. Wonderful. Especially for those who've already gotten the uptick in their portfolios.

But there's lots to consider at Sears. At the top of the list is its recent $1.9-billion acquisition of catalog merchant Lands' End. When the deal was announced, I wrote that Sears had basically acknowledged it erred in closing its own catalog a decade ago. That doesn't mean the fit with Lands' End will be perfect. Big acquisitions are tough. More, Lands' End has a totally different culture than Sears, and if the bigger company hurts the Lands' End relationship with its customers by marrying a downmarket brand with a somewhat upmarket one, the results will hit the Sears bottom line.

Already, Sears has noted that its monthly same-store sales are lagging projections, but Wall Street hasn't cared because Sears isn't a telecom or energy-trading or software stock. (Sears had its own crisis over reporting profits from its credit-card operations years ago. Perhaps it's immune to accounting woes now.)

If, in fact, the economy really does pick up, investors already have rewarded Sears. That's why Goldman Sachs analyst George Strachan lowered his rating on the company to market performer from outperform on June 20 – because the stock already had achieved his targets.

And then there's Starbucks (SBUX: Research, Estimates). As the company continues to exceed its own expectations of growth, investors have hungrily bid up the shares 29 percent this year. Bully for Starbucks shareholders. In fact, it's tough to find anyone to say bad things about this java-charged powerhouse. So much so that you even hear a variation of the old valuation-doesn't-matter argument you used to hear about tech stocks.

W.R. Hambrecht analyst Kristine Koerber, a Starbucks bull, notes that the company trades for about 43 times calendar 2002 earnings and 35 times 2003 earnings, both figures well above the chain's 21 percent projected growth rate. Why doesn't this trouble her? "Starbucks always has had a lofty valuation to its growth rate," she says, noting that the P-E ratio has ranged from 31 to the low 80s.

Again, the Seattle-based coffee retailer is firing on all cylinders. But in order for it to grow it has to continue to open new stores. With currently 5,500 stores, Starbucks says it can go as high as 20,000. The moment it can't profitably open new stores, the growth rate hits a wall and the stock does too.

Do you know when that moment will be?

Adam Lashinsky is a senior writer for Fortune magazine. Send e-mail to Adam at adam_lashinsky@timeinc.com.

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Find this article at:
http://money.cnn.com/2002/06/28/commentary/bottomline/lashinsky/index.htm


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