Should You Buy on These Dips?
Earnings season brought some big dips in well-known stocks, but are these opportunities to snatch up shares, or do the sell-offs represent true cracks in business models? Here's a look at some of the potential bargains, and potential traps.
Switching to decaf
After reporting earnings, Starbucks (NAS: SBUX) shares are off more than 10% with news of European store closings and lower projected growth. However, the Europe, Middle East, and Africa regions contribute a tiny proportion to Starbucks' total operating income. Of the $1.5 billion in operating income for the previous three quarters, only $16.7 million came from Europe. Closing European stores will be costly, as when the company closed Australian stores in 2008, but it will also be proven as the right move in the region with a more mature coffee and cafe culture.
In places with less knowledge of the difference between a cappuccino and a macchiato, Starbucks still has a huge opportunity. In the China and Asia-Pacific region, revenue grew 31% while operating income grew 37%, and the company opened more than 100 new stores in the quarter. This brings the total to more than 3,000 stores in the region, compared with 12,500 in the Americas region.
In the Americas, Starbucks' largest market, same-store growth slowed to 7% from 8% a year earlier, but the stores are being run even more efficiently, with operating margin increasing more than 1%. In addition, Starbucks penned a deal with Coinstar (NAS: CSTR) , which will sell its Seattle's Best Coffee brand through coffee kiosks. It even launched a line of K-Cups and acquired a bakery to better compete. To me, it appears this sell-off just took the foam off of the top of a strong, underlying business.
A torn tortilla
Since its most recent earnings report, Chipotle (NYS: CMG) shares have fallen more than 25%. Whereas a few weeks ago, investors praised Chipotle for its unstoppable brand, management, and balance sheet, now investors fear that it's just another burrito joint. While same-store sales growth fell to 8% from the previous quarter's 12%, it still tops the industry -- as does its P/E ratio. However, its recent P/E of 35 is much more palatable than previously, when it traded around a P/E of 50.
What does paying 35 times earnings get a new investor? Besides the proven management and business concept, the opportunity of a burrito-filled world. Chipotle has yet to expand beyond the U.S. and Canada. Currently, this protects it from slowdowns in Europe and China, but it also exemplifies how much room its burritos have to run. As Fool colleague John Maxfield points out, former Chipotle investor McDonald's earns more than half of its revenue from abroad.
Game maker Zynga (NAS: ZNGA) and ubiquitous social network Facebook (NAS: FB) both received drubbings after their quarterly reports. Zynga fell almost 40%, while Facebook is down more than 15% over the past few days. As I wrote previously, "Zynga, like a teenager, craves popularity and needs it to survive." Zynga just lost the homecoming game, or the student council election, or maybe it wore an outdated pair of shoes. Citing "a faster decline in existing Web games ... and reduced expectations for Draw Something," Zynga cut forecasts. While there will be a bottom to Zynga's fall, the popularity cycle of its games requires too much investment to stay relevant.
Facebook, which depends on Zynga for about 10% of its revenue, continues to grab at virtual straws to capitalize on its almost 1 billion users who use it at least once a month. Until it finds a moneymaking concept, Facebook's stock price will continue to slide as investors realize that just because everyone uses a service, that doesn't mean anything if it's a free service.
Another buying opportunity
Big moves like these sell-offs can provide great buying opportunities as other investors react to their emotions, and institutional investors don't want to be caught holding a big decline. Just be careful to make sure that only the stock price is broken, and not the business.
Unfortunately, there might not always be the perfect buying opportunity for some stocks that you should be holding. And even though you may not get the price you want, good-quality stocks can provide fantastic returns and growth wealth over the long term. For three such stocks that you should check out, read our free report: "3 Stocks That Will Help You Retire Rich."
The article Should You Buy on These Dips? originally appeared on Fool.com.Fool contributor Dan Newman holds no position in any of the above companies. Follow him on Twitter, @TMFHelloNewman. The Motley Fool owns shares of Chipotle Mexican Grill, Facebook, and Starbucks. Motley Fool newsletter services have recommended buying shares of Facebook, Starbucks, and Chipotle Mexican Grill and writing covered calls on Starbucks. We Fools don't all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. Try any of our Foolish newsletter services free for 30 days. The Motley Fool has a disclosure policy.
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