How to Spot the Hype and Stay Opportunistic

Kelly Green
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October 30, 2024
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Comments

I love it when a company raises its dividend. For most of the big companies we hold long-term, it happens like clockwork after four steady payments are made. And yet, the announcement still makes the financial news even though it was pretty predictable.

You all know that I keep an eye out for dividend changes. One that caught my eye last week was Starbucks (SBUX), which announced its 14th straight annual dividend increase. I don’t usually follow this stock because it does not meet our minimum dividend yield of 3.5%.

However, as a customer, I’ve been thoroughly disappointed with my Starbucks experiences lately. This is coming from someone who still has their Starbucks gold card from 2014. From a consumer perspective, the prices have gone up, the quality has gone down, and service is slower than usual. So, I checked to see if shares have dropped enough for us to see a decent yield.

Nope.

The yield is 2.5% and shares still trade at a P/E of 27 despite a 25% year-over-year crash in GAAP earnings per share in Q3. Comparable store sales dropped 10% in the US and 14% in China. Yet, shares didn’t react…

Why? Because we’re still stuck in the hype from the August 13 news that former Chipotle CEO Brian Niccol would be manning the helm of the coffee giant.

Noise Versus Numbers

I spent way too much time going down the research rabbit hole about Brian Niccol. The short version is that he was at Taco Bell, then Chipotle, and now Starbucks. Despite changes in the macroeconomic landscape over the past decade, I would say that overall, the customer and employee experience suffers when Niccol gets involved.

On the flipside, the stock does well. Chipotle now trades at 60 times earnings. There’s no way a big, mature company like Chipotle can grow its profits to warrant that kind of stock valuation. Even if Brian Niccol can somehow hype shares higher, is this a stock you want in your portfolio?

It comes down to knowing your purpose when you are picking stocks—are you investing or speculating? I am for the most part an investor. I want to buy shares and stake my ownership claim on a solid business at a good price. Then I sit back and collect my dividends for decades. Speculators are looking at the share price numbers on a screen and guessing whether they will go up or down.

I’m not saying you shouldn’t speculate. I even recommend some speculative plays in Yield Shark. We are speculating that something will happen either with the company or in the economy that will boost the share price and then we’ll move on.

Here’s the point: know what you’re holding and why you’re holding it. It’s important. And it’s equally important to spot whether something in the financial news is hype or something to be worried about. Only then can you use it to your advantage.

This Bedrock Play Is Back in My Buy Range

If rate cuts continue, investors will see the yields of their FDIC-insured bank products fall as well. Money will gradually flow into dividend-paying stocks to offset the loss of income. And we’ll see those stock prices start to creep up.

Many of my favorite long-term plays have already seen this creep start to happen. That’s great if you already own the stock. Not great if you don’t because it’s pushing shares above my recommended buy-up-to-prices. One example is Kimberly-Clark (KMB), which saw its stock run up 24% this year.

Exactly why this happened, I couldn’t tell you. The company is working hard to restructure for future earnings growth, but there hasn’t been anything super exciting.

KMB is still a big, boring toilet paper and diaper company. It holds a portfolio of very recognizable brands that consumers will continue to use for years. But the return to future growth still hasn’t materialized fully in the numbers.

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In last week’s earnings release, it cut some of its full-year guidance numbers. It slapped investors out of the trance they’ve been in through 2024 and sent shares tumbling 6.6% for the week.

The pullback dragged shares of KMB back into our buy range. This is the kind of news we can use to our advantage. Despite the current challenges, KMB has been improving its margins and preparing for the future.

Starbucks is a speculative play at best. Instead, I like to look for news or numbers that move the stock of companies I want to hold long-term. And KMB is just that. The market is giving us another opportunity to grab shares of KMB before its strategic transition is over. I like shares up to $139.42 to guarantee you lock in our minimum yield of 3.5%.

For more income now, and in the future,