According to recent reports, billionaire Paul Singer and his activist hedge fund Elliott Investment Management have taken a large position in Starbucks (NASDAQ: SBUX). The coffee house operator has seen its stock struggle in recent years. It’s down over 15% in the past five years, while the S&P 500 is up over 85% during the same stretch.
With Elliott’s involvement, should investors follow suit and pile into Starbucks shares?
Elliott’s stake in Starbucks was first reported by The Wall Street Journal, with the newspaper just stating that the hedge fund had taken a “sizable” position in the stock. Depending on the timing of the purchases and how much of the company it owns, it may take some time before Elliott is required to report the size of its stake. If it is under 5% of the company and the purchases were made largely in July, Elliott would not be required to disclose its position until after the close of the third quarter.
According to reports, Elliott has been in discussions with Starbucks management about ways to help improve the company’s business and boost its lagging stock price. Elliott is one of the most active activist investors on Wall Street, running activist campaigns involving more than 140 companies over the past three decades.
Elliott is known to use various tactics in its activist campaigns. It can be more aggressive in calling for new leadership at a company or asking it to sell off businesses, while it can be more collaborative with management teams to help them get the most out of their businesses.
The fund’s involvement with vision-board social media company Pinterest, for example, coincided with a resurgence in the company’s business that saw technology investments it made turn into the better monetization of its large user base. In other words, it found a way to make money from its users.
Given the size of Starbucks and its hallowed history, I’d expect that Elliott is taking a more friendly approach with Starbucks and also looking to engage former CEO Howard Schultz on ways to help turn the company around. Schultz remains the company’s largest shareholder, and he returned to the helm as CEO in 2008 following his retirement in 2000 to help turn the company around then.
For his part, Schultz has publicly said that Starbucks needs to focus on its roots of coffee and fix its U.S. operations first and foremost. He also wants the coffee house operator to improve the customer experience, and improve its mobile ordering and payment systems.
This seems to fly a bit in the face of what current CEO Laxman Narasimhan has been doing, as he recently promoted the company’s new non-coffee drinks such as boba drinks and an energy drink. The company has also seemingly reduced its workforce and has been looking to rely more on technological advancements to keep up with orders.
Long wait times at peak hours have hurt the company’s results in the U.S., and there have been many reports of the stores having fewer baristas. While technology may help improve getting orders out more quickly, the company has lost some of the human touch in its stores. Given that Starbucks has long been considered a premium brand that is focused on the experience, you can see why this may be an issue.
Image source: Getty Images.
I view the involvement of Elliott at Starbucks as a big positive. I wouldn’t be surprised to see Elliott and Schultz team up to enact the changes that Schultz has talked about in recent times. This could be a transition, as more workers add costs. But if it boosts sales and reinvigorates the brand, it will be more than worth it.
Both Elliott and Schultz have nice histories of enacting turnarounds, so this could be a great time to get into the stock. I also wouldn’t be surprised at a change in the executive seat, which I think the market would welcome.
SBUX PE Ratio (Forward 1y) data by YCharts.
At the same time, the stock’s struggles have left it with an attractive value. It’s trading at a forward price-to-earnings (P/E) ratio of 19, based on 2025 analyst estimates. Given Elliott’s involvement and the likelihood of Schultz getting involved, now looks like a good time to scoop up some shares of Starbucks ahead of a potential turnaround.
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Geoffrey Seiler has positions in Pinterest. The Motley Fool has positions in and recommends Pinterest and Starbucks. The Motley Fool has a disclosure policy.
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