Starbucks Corp. (SBUX) has been one of the better performing stocks of 2019, with shares racing higher by over 37%. It is easily better than the S&P 500’a gain of about 26% over the same period. However, investors do not appear to be optimistic for the future, with sellers outpacing buyers by approximately 2-to-1 during the third quarter.
The significant stock advance in 2019 has also stretched the company’s P/E ratio. Given the prospects for future earnings growth, it doesn’t bode well for the future direction of the stock price either. It could be one reason why investors were eagerly leaving the shares in the third quarter.
Institutions Dump Shares
During the third quarter, the total number of 13F shares held by institutions fell by almost 4% to 818.5 million from approximately 847.7 million in the second quarter. During the quarter, 503 institutions added to their existing positions, while 97 created new ones. Conversely, the number of firms decreasing their positions was at 858, while 64 sold out of the stock. Also, the number of firms holding Starbucks among their top ten holdings in their portfolio fell to 81 in the third quarter, down from 89 in the second quarter.
One reason why investors may be fleeing from the stock is that future earnings growth is expected to be slow. Currently, analysts project earnings to climb by 7.5% in fiscal 2020 to $3.04 per share. Meanwhile, earnings estimates show growth of 12.7% to $3.43 in fiscal 2021 and by 10.8% to $3.80 per share in 2022.
High Earnings Multiple
The problem is that the stock currently trades for roughly 26 times fiscal 2021 earnings estimates. That price-to-earnings multiple is not cheap when adjusting for future earnings growth. Earnings growth for the next three years is forecast to grow at a compounded annual growth rate of 10.3%. It means that the stock trades with a PEG ratio of about 2.5. That is much higher than a range of 1 to 1.5, which is considered to be a reasonably valued PEG ratio.
The slow earnings growth and high P/E ratio may be one reason why the stock has slumped some since peaking at a price of around $100 in late July. It may also be the driving force behind investors fleeing the stock during the third quarter.