SUCCESSFUL INVESTING: Aggressive Starbucks vulnerable to increasing costs

Q. It looks like Starbucks Corp. is on a roll. I own some sharesnow and may buy more. What is your opinion of this stock? - A.R., viathe Internet

A. This Seattle-based company's quest for world domination,spoofed by comedians such as Mike Myers in the Austin Powers movies,continues unabated.

The real question is how long it can profitably continue itsbreakneck growth.

Aggressively buying prime real estate locations, the chain now hasmore than 8,000 stores, nearly 6,000 of them in the United States.

It is opening 1,300 new stores in its current fiscal year andplans to launch another 1,500 in its next fiscal year, which beginsin October.

Its drive-through stores have been especially profitable, and ithas also installed wireless Internet connections in more than 3,000U.S. cafes.

The popular Starbucks debit card that speeds sales transactions isbeing featured in Greece at the Summer Olympics, with U.S. andCanadian cardholders able to use their cards there.

While adapting to new cultures overseas carries risk, the firmexpects considerable overall growth throughout its internationaloperations. For example, it recently bought nearly half of Malaysia'sBerjaya Coffee Co., which owns and runs 49 Starbucks cafes in thatcountry.

Shares of Starbucks (SBUX) are up 37 percent in 2004, following a63 percent gain last year. Earnings in the company's recent fiscalthird quarter were up 44 percent and sales up 27 percent. It hasraised its expectations for the final quarter of its fiscal year.

There are a few concerns, however. Prices of milk and green coffeebeans have risen, so Starbucks management has included in itsfinancial projections the likelihood of a beverage price increase inNorth America for fiscal 2005.

In addition, competitors such as Dunkin' Donuts and McDonald'sCorp. have plans to cut into some of the Starbucks business byaggressively offering their own premium coffee drinks.

So confident are investors about continued Starbucks growth thatany disappointing news or negative earnings surprises might send itsstock price tumbling.

The high-flying shares of Starbucks receive a consensus "hold"recommendation from analysts, according to the Boston-based FirstCall research firm. That includes four "strong buys," two "buys," 10"holds" and one "strong sell."

Earnings are expected to grow 42 percent this year, versus 18percent forecast for the restaurant industry. Next year's projectedgrowth rate of 20 percent compares to 12 percent expected for itspeers. The five-year annualized growth rate forecast is 21 percent,versus 12 percent industry-wide.

Q. I've stuck with Fidelity Blue Chip Growth Fund through some badyears. Are there good days ahead for this fund? - L.B., via theInternet

A. High oil prices and rising inflation made investors lessenthusiastic about investing in growth stocks. That's been bad newsfor funds espousing a growth philosophy and also for their investors.

This fund trailed the performance of the Standard & Poor's 500over the past five years. Its enormous asset size also makes itdifficult to move quickly.

The $23 billion Fidelity Blue Chip Growth Fund (FBGRX) gained 8percent over the past 12 months and had a three-year annualizeddecline of 5 percent. Both results rank in the upper half of largegrowth funds.

It does, however, feature a relatively low annual expense ratio of0.69 percent.

"If growth stocks continue to come under pressure, this fund isbetter positioned and has less risk than most other growth funds,"said Jack Bowers, editor of the Fidelity Monitor newsletter(www.fidelitymonitor.com), Rocklin, Calif. "It is diverse in itsindustry group holdings and not overly concentrated in any one ofthem, so it is a solid offering that won't have any really bigsurprises."

Portfolio manager John McDowell has run the fund since 1996 andmanaged institutional money since the 1980s. Because the fundincludes few speculative stocks, it can be a core holding in anindividual's portfolio.

Twenty-one percent of Fidelity Blue Chip Growth Fund's portfoliois in health care. Other significant concentrations are hardware,consumer goods and industrial materials. Top holdings were recentlyMicrosoft, Pfizer, General Electric, Intel, American InternationalGroup, Johnson & Johnson, Cisco Systems, Citigroup, Wal-Mart Storesand Procter & Gamble.

This "no-load" (no sales charge) fund requires a $2,500 minimuminitial investment.

Q. What's your opinion on the current and future health of realestate investment trusts as growth and income vehicles? How willrising interest rates affect them? - T.S., via the Internet

A. A REIT is a real estate company offering dividend-paying sharesto the public. To qualify as a REIT with the IRS, it must pay out asdividends at least 90 percent of its taxable profit.

The Morgan Stanley REIT Index of 121 stocks had a total return of37 percent in 2003. It was up 13 percent this year until April, whenrelease of the March payrolls report and accompanying interest rateworries sent it into a tailspin. It has since rebounded and is now upabout 9 percent for the year.

Average dividend yield of REITs on the index was recently 5.4percent.

One downside of interest rate increases for REITs is thatincreasing bond yields begin to compete with dividend-paying stocksfor investor attention. In addition, REITs are dependent on borrowingfor new property acquisitions and expansion, so rate hikes drive upthe cost of their debt.

"REITs rebounded because it's become clear that real estatefundamentals are starting to improve and company earnings are comingin higher than expected," said Barry Vinocur, editor of the RealtyStock Review newsletter (www.realtystockreview.com), Novato, Calif.

"In addition, because experts have told investors to lower theirexpectations for the overall stock market, they've decided to commitmore to real estate."

REITs emphasizing hotels and apartments usually do better thanother REITs when rates increase because they use shorter-term leasesthat can be raised the fastest, Vinocur said.

Leckey answers questions only through the column. Addressinquiries to Andrew Leckey, #184, 369-B Third St., San Rafael, CA94901-3581, or by e-mail at andrewinv@aol.com.