Red Hot Commodities

By Ian Wyatt, Big Idea Investor | SLV | May 02, 2006 | comment

Red Hot Commodities 

By Ian Wyatt, Editor-in-Chief, Growth Report 

The commodities market is rocking, with commodities soaring to recent highs. 

Just this week, Barclays Global Investors launched the iShares Silver Trust (AMEX: SLV), an exchange-traded-fund (ETF) that tracks the price of silver.  The launch of the silver ETF comes roughly a year and a half after the StreetTracks Gold Trust (AMEX: GLD) was launched. 

With silver currently trading at its highest price in the last twenty years, the launch of this ETF should come as no surprise.  Investors quite clearly have an appetite for commodities, including the precious metals. 

And now through the launch of the gold and silver ETFs, it is easier than ever to buy these commodities using a regular online brokerage account. 

At Big Idea Investor we first covered the new gold ETF in December in an article titled "Gold-to-Oil Disparity Creates Big Opportunity."  The entire article can be read in the December 14 issue of Big Idea Investor by clicking here. 

In that article, I argued that the prices of crude oil and gold are highly correlated over the long term, and that with oil then trading at $59 per barrel of crude, gold was looking very attractive.   

I encourage you to read my previous article, because in it I outline a compelling argument for owning gold, even with the price of the yellow metal trading at its highest price since 1980.  Since our bullish comments on gold in early December, the commodity has rallied from $525 per ounce to $665 per ounce, a 27% gain. 

However, everyone knows that oil is the biggest commodity that impacts every sector of the economy and consumer behavior.  As we previously reported, crude oil began trading in ETF form in early April with the introduction of the U.S. Oil Fund (AMEX: USO), which tracks West Texas Intermediate crude oil. 


Starbucks Brews Up Movies 

By Vijay Balkissoon, Staff Writer, Big Idea Investor 

Coffee king Starbucks (Nasdaq: SBUX) continues to venture into new deals to capture additional revenue by selling and promoting non-coffee products such as CDs and now movies to its nearly five million daily customers.

The Seattle-based coffee company has applied its success in the music biz to the silver screen with its promotion of the new Lionsgate Entertainment (NYSE: LGF) film "Akeelah and the Bee," which tells the tale of an 11-year old South Central Los Angeles girl's attempts to make it to the National Spelling Bee. Starbucks loyalists may have noticed that stores are lined with Akeelah coasters and chairs labeled "Reserved for the local spelling bee champion." Additionally, travel Scrabble' games and the "Akeelah and the Bee" CD soundtrack are now for sale at Starbucks stores.

Though "Akeelah and the Bee" and its opening weekend take of just $6.25 million hardly set the world on fire, Starbucks is hungry for more movie promotion deals. The company revealed on Monday that they have signed a deal with Beverly Hills, California-based talent agency William Morris to help Starbucks find more movies -- and books -- to promote within its nearly 11,000 stores worldwide. 

The deal is the latest in a string of moves that has seen Starbucks transform from a lifestyle brand into a seller of other merchandise to its loyal customer base, along the lines of an Oprah Winfrey or a Martha Stewart.  The "Starbucks experience" now consists of much more than a double tall latte.  Or, in the words of Starbucks chairman Howard Shultz: "We want to see our name associated with the kind of music, literature, and movies that people will say, 'I'm glad Starbucks brought this to the marketplace.'" 

In exchange for its promotion and marketing efforts, Starbucks has received an equity stake in "Akeelah and the Bee," the exact value of which has not been disclosed.  However, the true value of such deals, as Shultz alludes to, might not be measured in strictly monetary terms.   

If Starbucks is successful in turning its customers onto movies, books, and music that they consistently enjoy, the company should engender a great deal of goodwill and trust in their customers.  Conceivably customers will keep coming back for coffee and also for CDs, DVDs, and any other carefully selected merchandise available for sale at Starbucks stores. 

As we remarked in our article on Starbucks' impressive entry into the music biz, "this is not a company that is content to sit idly by, [and instead continues] to look for new ways to grow and reinvent itself." It is no wonder then, that the company has continued to trade at a premium PE multiple -- just over 58 times 2005 earnings when this article was written.   

And indeed, though naysayers have said for years that the stock is too expensive and that the company could not possibly remain on the same growth trajectory, Starbucks has risen to the occasion again and again.   

In the last five years, Starbucks has grown at an astounding 25% a year on the back of continued expansion.  At the company's annual meeting in February, Starbucks indicated that the torrid expansion would continue, saying that it has plans to open five stores a day throughout 2006.  Longer term, the company expects to eventually operate some 30,000 stores worldwide.  Starbucks sees much of that global expansion coming in the potentially enormous China market.  Presently the company has only 386 locations in China, compared to nearly 8,000 in the U.S.  

It is estimated that some 34 million customers visit Starbucks locations during the course of any given week.  Those millions and millions of customers mean that Starbucks has some incredibly valuable real estate.  In promoting "Akeelah and the Bee" could the company have misused this real estate? Or did the movie not "connect" with customers? At this early stage, we can only wonder.  However, it seems to us that Starbucks is ideally suited to move high volumes of music, movies, and books at the point of purchase -- as opposed to sending customers to non-Starbucks locations such as movie theaters.  We believe that when the company begins selling "Akeelah" DVDs the results will be much more Starbucksesque.   

At Growth Report our research team aims to uncover the next Starbucks, Dell, or Microsoft.  How do we do it? 

By diligently researching young growth stocks with big long-term prospects.  Some of our biggest successes to date include J2 Global (+746%), Bankrate (+706%), Lexar Media (+444%), and Sonic Solutions (+333%). 

Begin getting Growth Report's top new stock picks each and every month, plus learn about the 19 high growth companies in our model portfolio today that should see an outstanding 2006.  Start a 30 day free trial membership by clicking here now.


Ask The Editor: Commodity Stock Plays

Big Idea Investor subscriber Mr. Wijaya recently wrote to us, "I [would] like to see more good recommendations and coverage of solid commodities based companies.  I think the game is not so much in technology now, but in bolts and screws and other kinds of metals." 

Mr. Wijaya, 

Thanks for your comments.  To date our coverage of the commodities sector has been largely limited to the commodities themselves.  As you'll see in our article Gold-to-Oil Disparity Creates Big Opportunity (click here), we were bullish on the prospects of gold at $525 and remain bullish on the commodity today.   

Regular readers of this newsletter also know that we've been incredibly bullish on the oil and gas sector.  Our research indicates that the run in crude oil and not ending anytime soon, as demand is likely to continue outpacing supply for many years. 

That said, we are not commodities traders or experts.  At Big Idea Investor, we are fundamental investors.  We look for great companies that have exposure to some of the biggest investment trends.   

To that end, at my Growth Report newsletter advisory, we are aggressively buying oil and gas services companies.   

Why service companies, instead of the commodity itself or exploration and production companies?  Because we want to limit potential risk.   

By owning the service companies, we gain exposure to the increased oil exploration that is occurring due to high commodity prices.  The companies in our portfolio are booking record profits and significant revenue growth.  And at the same time they don't have the operational risks that smaller exploration companies might have.   

In the Growth Report portfolio we continue to play the oil and natural gas boom by buying some great high growth names that are being overlooked in the marketplace.  Thus far, our strategy is panning out with our average gains in the sector sitting pretty at 30% since December.   

If you're interested in the booming oil and gas exploration sector, I encourage you to click here now to get a complimentary copy of our special report, Oil Rush of 2006: Top 6 Oil & Gas Stocks.  The report is yours, absolutely free, with a 30 day trial membership to Growth Report.  Just click here now to get started. 

We'll continue to bring you more coverage of commodities and companies with commodity exposure in the coming issues of Big Idea Investor.

Have a question for us? Email it to . 

Regards,

Ian Wyatt
Publisher
Big Idea Investor


McDonald's to Complete Chipotle Spin-off Sooner Than Anticipated

By Big Idea Investor Staff 

On April 26, McDonald's (NYSE: MCD) announced that they would complete their spin-off of burrito chain Chipotle (NYSE: CMG) by the end of this year.   

According to a company press release, McDonald's will sell 5 million shares of Chipotle stock, using the proceeds to purchase McDonald's shares in the open market.  By the end of the year, McDonald's will completely separate from Chipotle by facilitating a tax-free exchange of Chipotle shares for McDonald's common stock. 

Analysts had expected that the spin-off would occur more gradually.  However, McDonald's has been under significant pressure from investors, most notably hedge fund Pershing Square Capital Management, to create more value for shareholders.

For Chipotle, the first thing to go will be the advantageous cost structure they have enjoyed for the past eight years as a McDonald's subsidiary.  

Chipotle has relied upon McDonald's extensive distribution network and favorable relationships with suppliers.  McDonald's has even helped Chipotle with certain back-office operations. 

As noted in their prospectus, Chipotle could be forced to raise prices in order to compensate for the loss of McDonald's pricing power.  Shares of Chipotle fell by as much as 5.5%, to $48.30, on the news, but have since rebounded, closing yesterday at $54.56. 

Chipotle is due to report Q1 2006 results on May 8.  Consensus analyst estimates currently call for the company to earn $0.12 per share on revenues of $171.7 million for the quarter.  For the full year ending December of 2006, analysts expect EPS of $0.69 on revenues of $775.6 million.  Shares command a healthy multiple of 79x 2006 consensus EPS.   

While we're all for buying growth companies, the valuation on Chipotle appears very rich.  After looking at Starbucks earlier in this issue, that stock looks downright cheap trading at 53x 2006 consensus EPS.  

With shares of Chipotle trading at +$50, investors must be expecting strong first quarter results.  As with many richly valued growth companies, any indication of a potential slowdown can result in rapid panic selling following results. 

We're all for Chipotle posting a great quarter.  As we've mentioned before, we're big fans of the company and its products.  We'll keep you in the loop on the results.

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