Starbucks Corporation (SBUX): An Insider-And Former Defense Secretary-Is Guzzling Shares

About a year ago, former Secretary of Defense Robert Gates joined the Board of Directors of Starbucks Corporation (NASDAQ:SBUX). Now a Form 4 filed with the SEC has disclosed that Gates directly purchased 3,300 shares of the restaurant’s stock on May 1^st at an average price of $60.49 per share, giving him nearly 10,000 shares of the company. Studies show that stocks bought by insiders exhibit a small outperformance effect (read our analysis of studies on insider trading); our explanation for this is that company insiders should instead choose to diversify their wealth except in cases when they are particularly confident in the stock’s prospects.

The second quarter of Starbucks Corporation (NASDAQ:SBUX)’s fiscal year ended in March, with the company reporting an 11% increase in revenue compared to the same period in the previous fiscal year. Slightly more than half of this sales growth came from improvements in comp sales, which in turn was based on a larger number of customers with only a small contribution on the ticket front. The business also increased its margins and as a result earnings were up by 26%.

We would be a bit concerned, however, that Starbucks will not be able to continue to increase its net margin at such a fast pace and that earnings growth will occur at a lower rate in the future. The market is pricing in continued high growth, with the stock trading at 32 times trailing earnings, and that might turn out to be too aggressive if improvements in net income do converge downward towards sales growth. Consensus forecasts for the fiscal year ending in September 2014 imply a forward P/E of 24.

We track quarterly 13F filings from hedge funds and other notable investors. The information included in 13Fs is useful in developing investing strategies- for example, we have found that the most popular small cap stocks among hedge funds earn an average excess return of 18 percentage points per year (learn more about our small cap strategy)– and we can also track interest in individual stocks. Billionaire Steve Cohen’s SAC Capital Advisors more than doubled its holdings of Starbucks during the fourth quarter of 2012, to a total of 3.5 million shares (see Cohen’s stock picks). Renaissance Technologies, managed by billionaire Jim Simons, initiated a position of 1.4 million shares (find Renaissance’s favorite stocks).