Be wary of advice from the bandwagon riders. They care more about getting more people in the bandwagon than anything else.
The Starbucks (SBUX) bandwagon is a big one. The large majority of analyst ratings are “buy” or “strong-buy”. Even the Motley Fools like the stock.
The main reason they all like the stock is: everyone else likes the stock and as long as it remains popular, the trend is your friend.
Clearly, I am not on the bandwagon and I recommend you jump off too before it runs over the valuation cliff. My reasoning in a nutshell: I doubt home brewing coffee will ever be as profitable as investment banking.
This is not my first Starbucks rodeo. In November of 2006, the Starbuck’s bandwagon was a raging party when I recommended investors sell/short the highly overvalued stock at nearly $40/share. The stock dropped steadily over the next two years to under $8/share as SBUX went from being everyone’s favorite to everyone’s dog.
The stock should not have gone as low as $8/share any more than it should have been at $40/share in 2006 or $50/share in 2012. But that is how the market works these days.
Stocks routinely get pushed well beyond reasonable highs and lows. These are volatile and tricky markets.
Momentum investors have thrived over the last several years as their speculative strategies are well-suited for these kinds of markets. However, keep in mind that “speculation” is different from “investing”...
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(Read more from David Trainer on his blog, The Intelligent Investor.)
