Buy Starbucks? Bill Ackman May Have a Point

Bill Ackman may be onto something.

The Persist Square Capital Management, the founder and CEO of hedge fund, reported Tuesday Oct. 10, that his fund currently holds a 1.4% stake in Starbucks Corp. (SBUX) The stock immediately popped 3% on the news, and settled 2% higher on the day.

Ackman's stake could be a positive indicator for those already in the stock. "JJ Kinahan, chief market strategist at TD Ameritrade, told TheStreet. "You see how much he bought – if you're somebody who already holds it, you're feeling better about your investment."

There are reasons to buy Starbucks, mainly because of opportunity in both the U.S. and China. While doing so, Ackman makes a valid point in buying Starbucks.

"The crux of what's being pointed out by Pershing is what's going on in a valuation perspective, and what they're doing to reevaluate the U.S. business," said Markus Hansen, senior analyst at Vontobel Quality Growth Asset Management.

"The stock has significant upside over time," he added.

Ackman may have found a value in the stock, as it is trading at a price-to-earnings ratio of 18, perhaps more than the average P / E ratio for S & P 500 companies of 23. " has done nothing, "said Hansen.

Indeed, the stock is down on 0.7% this year, as its sales have essentially flatlined, growing at 1% year in the July quarter, down from 2% in the previous quarter. Hansen, along with Ackman, said he thinks Starbucks has gotten back on his feet in the U.S., and that management is pulling the right strings to get there. Others agreed.

"Bill Ackman's position could be more passive as Starbucks is in the process of taking steps to improve their business," said Cynthia Frick, senior equity analyst at USAA. "The company needs to drive traffic increases in the U.S." The United States represents about 70% of Starbucks' revenue.

A Revamped U.S. Business Can Get Back on Its Feet

"Management is doing everything right," Hansen said. He said that he should be looking for growth in the United States, which is in line with the outlook for the next several years. The coffee chain could be on the road to achieving that growth.

The company's mobile app is an important piece to the puzzle. "The way we shop now has changed, and Starbucks has embraced that," Hansen said. After the problems of the customer and the customer, Johnny believes the new CEO Kevin Johnson is a big reason why the app has become efficient again. "Kevin Johnson has been the right guy on the technology change," he said. Hansen also mentioned Starbucks' recent turn to healthier drinks, which customers have indicated.

Still, the economic cycle looms as a potential headwind. Many believe the U.S. is nearing the peak of the economic boom. Consumer discretionary stocks generally do not perform well as consumer spending downward ticks. "If you think the economy is gonna slow, that's a definite risk," Kinahan said. "If the economy slows down, people will bring in the kidneys, and this is an area where they feel like they can save." Starbucks offers a good meal coffee than the competition. While Starbucks is not insanely expensive, an economic downturn could chase consumers wallets at cheaper coffee. "If you think we're having a slowdown period, we'll choose a Dunkin '(DNKN), etc.," Kinahan added.

China Business Could Grow Explosively

Investors and analysts also have their eyes on the China opportunity. "That's a huge country, so many people," Kinahan said. "The number of shops there compared to the population in some of the cities, there are expansion opportunities." That's exactly Hansen's thesis as well. "China is a great long-term growth boost for the company," Hansen said.

Starbucks has about 3,000 stores in China, but it could get to 6,000 stores, Hansen said. Regarding population growth, Hansen said there about 300 million millennials in China currently, which is Starbucks' main demographic. That number could get to 450 million by 2023, a 50% increase, Hansen noted.

Still, Starbucks will have to boost U.S. sales, Hansen said. That sales growth has been made in the United States by Hansen, whose firm holds Starbucks for its customers, said, "My guess is we're starting to see the fruits of that going into the beginning of next year."

"We're in for the long term," he added.

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