The longer you invest in the public markets the easier it is to identify your past mistakes. While these errors have cost you some money before, hopefully you can learn enough to reduce those losses in the future. Until I reach an age where my memory starts failing me, the cases where I sold too early will be a constant (positive) reminder that getting too worked up about near-term valuations for stocks with excellent long-term outlooks can result in leaving a lot of money on the table.

Back in 2011 I lived in Pittsburgh where my now-wife was getting her PhD. A short stroll from our apartment was a fellow RIA (hat tip to Ron Heakins with OakTree Investment Advisors - hope you are doing well my friend) who organized regular meetings with local investment advisors to share ideas and stay on top of an ever-changing industry. I recently came across a brief PowerPoint slide deck I shared with the group back then over a weekend breakfast meeting at Bruegger’s Bagels. In hindsight, it exemplifies how selling too early for not the best reasons can cause heartburn down the road.

You can view the 5-slide deck on AutoZone (AZO) here and I will summarize it below.

The investment thesis was fairly simple. AutoZone held a strong position in a mature, economically insensitive industry and was using its prodigious free cash flow to conduct massive share repurchases (in lieu of taking the more tax inefficient dividend route). The ever-smaller share count helped AZO turn 7% annual sales growth into 22% annual earnings growth from fiscal 1998 through 2011, propelling the stock price to 21% annualized gains during that time (to $325 per share by late 2011).

Since I thought the trend was likely to continue, it was a worthwhile idea to share with our group. Simply put, AZO appeared to be a wonderful buy and hold stock and with the economic uncertainty still lingering in 2011 from the Great Recession, the business outlook appeared quite resilient regardless of where we were in the business cycle.

I can’t recall when I sold the stock after that, but I can tell you it has been an “on again, off again” investment during the ensuing 13 years for me and my clients, largely due to peaks and troughs in the stock’s relative valuation even as the core underlying story has remained unchanged the entire time. In hindsight, that was not the right call. The correct move was to simply buy and hold.

Despite AZO stock compounding at 21% per year from 1998 through 2011, the 2012-2024 period has seen similar performance, with the shares compounding at 20% per year to the recent price of $3,100. Trying to exit when it was overbought and add when oversold not only added more work than was needed, but also undoubtedly resulted in lower returns over the long term. Lesson learned.

Full Disclosure: No position in AZO at the time of writing, but positions may change at any time

With shares of Starbucks (SBUX) trading around 2019 levels (low 90’s) despite sales and free cash flow that are running well above pre-pandemic levels, I am getting close to boosting my firm’s exposure for my clients. With both a P/E and a P/FCF multiple in the mid 20’s, SBUX fetches a price at the low end of historical valuation ranges despite a competitive position that remains as strong as ever today.

**5 Year Price Chart of Starbucks SBUX Stock (2/5/24)**

The recent stock price weakness can be linked to negative press (a small but growing subset of stores whose workers believe unionizing is the answer to their prayers), as well as ever-rising retail pricing driven by underlying inflation that threatens to reduce consumer visits.

The first concern seems quite manageable given the overall size of the company. A few hundred unionized stores out of nearly 20,000 total in North America will hardly bite the company’s income statement. I believe the union momentum is likely slowing due to unimpressive results thus far (the two sides have yet to come to an agreement on a contract despite months and months of back and forth). The strongest evidence that disgruntled SBUX employees are simply looking for a scapegoat becomes evident when the media presses them on why they don’t simply quit and work somewhere else. After all, if SBUX treats their employees so badly relative to other chains, a mass exodus of good workers would probably be quite successful in getting SBUX executives to play ball.

Interestingly, the union hopefuls respond to such suggestions by pointing out that they can’t make as much money elsewhere and the benefits aren’t as good. This is true, of course, relative to smaller, more local coffee shops nationwide, but it blunts the impact of their pro-union arguments in almost comical fashion. Basically, SBUX is a better place to work than most other food service companies, but since they can’t get everything they want, they’re going to unionize. I suspect this flawed logic (they don’t really have any negotiating leverage) is why the vast majority of SBUX workers have not pursued a union vote and seem generally happy with their jobs.

The concern of inflation is always real, as SBUX has been forced to raise prices materially like everybody else in recent years. But for decades now the SBUX customer has generally seen the product as a relatively affordable luxury and regulars keep coming back during the ups and downs of most economic cycles. It is hard to see that trend changing now, after it withstood the Great Recession and the pandemic. As a result, the odds that SBUX continues to be a mature, dominant food service business with cash-cow characteristics for many decades to come appear quite high.

All in all, I view SBUX as a phenomenal business that currently trades near historical troughs in valuation terms (I went back about a decade to make that assessment). Don’t get me wrong - it’s far from dirt cheap, but great businesses rarely are, and buying high quality at very reasonable prices has served long-term investors very well over the long term.

Full Disclosure: Long shares of SBUX personally and for some clients, with the latter group likely to see larger purchases in the near future.