Nike and Starbucks have fallen from favor and may never recover
Over the past five years, the $.SPX(.SPX)$ has generated a total return of 108.2%. Short-term government bonds would have generated positive returns no matter the duration.
$Nike(NKE)$ would have lost you money!
$Starbucks(SBUX)$ would have lost a similar amount if it wasn’t for the recent bounce when former $Chipotle Mexican Grill(CMG)$ CEO Brian Niccol was announced as CEO.
What went wrong at these companies? There were operational problems, but let’s start with what investors were paying. You can see below that shares of both Nike and Starbucks were trading for over 30x earnings for much of the past five years. Even today, they’re trading for over 22x earnings.
What are you getting for that price? Companies growing in the mid-single digits…until recently.
Earlier this month, Nike announced that revenue dropped 10% in the fiscal first quarter of 2025. This week, Starbucks said same-store sales fell 7% in the most recent quarter and revenue would be down 3% overall.
Investing is all about risk (downside) and opportunity (upside). If you’re paying 30x earnings and a company is only growing in the mid-single digits, any hiccup could send shares lower (slow/negative revenue growth and collapsing multiples).
What appears to be safety from a big brand becomes a risk of brands being disrupted.
To give an idea of where I think a lot of risk lies today, here are companies trading for over 30x earnings and growing revenue a 5% or less over the past year:
$Apple(AAPL)$ (0.4% growth, 36 P/E)
$Tesla Motors(TSLA)$ (1.4% growth, 61 P/E)
$Abbott Laboratories(ABT)$ (3.1% growth, 35 P/E)
$Texas Instruments(TXN)$ (-14.5% growth, 34 P/E)
$American Tower(AMT)$ (3.9% growth, 42 P/E)
These are just a few of the companies worth over $100 billion trading at high multiples and growing slowly. Are they the next Nike or Starbucks?
Maybe.
It may sound crazy, but even more highly valued companies can be “cheaper” if they’re growing faster. Or, investors can get similar growth for a much lower price. Here are some of the growth rates and multiples in the Asymmetric Portfolio:
$Coinbase Global, Inc.(COIN)$ (74.2% growth, 39 P/E)
$MGM Resorts International(MGM)$ (15.1% growth, 15 P/E)
$Airbnb, Inc.(ABNB)$ (15.6% growth, 18 P/E)
$General Motors(GM)$ (6.3% growth, 6 P/E)
$Portillo’s Inc.(PTLO)$ (13.4% growth, 32 P/E)
These companies may not be household names and none are worth over $100 billion. However, the opportunity for future growth, margin expansion, multiple expansion, and buybacks outweigh the risk.
With this view on valuation, as a portfolio, I don’t need every stock to wildly outperform the market. I can be completely wrong on two or three of these stocks as long as I’m VERY right on one of them.
The same can’t be said about buying slow-growth stocks for high multiples. You better be right on all of them or you’ll underperform the market.
Sometimes, the riskiest investments may seem the safest. That’s a lesson it took decades for me to understand.
Disclaimer: Investing carries risk. This is not financial advice. The above content should not be regarded as an offer, recommendation, or solicitation on acquiring or disposing of any financial products, any associated discussions, comments, or posts by author or other users should not be considered as such either. It is solely for general information purpose only, which does not consider your own investment objectives, financial situations or needs. TTM assumes no responsibility or warranty for the accuracy and completeness of the information, investors should do their own research and may seek professional advice before investing.
