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Bill Freehling is a business writer for The Free Lance-Star and Fredericksburg.com. This blog is on Fredericksburg-area business. Send an e-mail to Bill Freehling.

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Understand Starbucks, understand the market

FOR MOST investors, interactions with the stock market don’t go beyond a telephone call to a broker or a click of the mouse.

A decision is made to buy or sell a stock. An order is placed online or over the phone, and the stock symbol appears on or disappears from our portfolios.

Many people probably never take the time to think about who exactly bought or sold the security to us. Or where the trade was actually executed. Or what motivated the buyer/seller to do the opposite of what we did.

Instead, we blissfully move on, not truly understanding how the markets work or what makes a stock go up or down (mostly down of late).

Karen Blumenthal lifts the veil on the mystery that is the stock market in her new book, “Grande Expectations.”

The longtime Wall Street Journal reporter spent a year, 2005, following one single stock: Starbucks. The result is “Grande Expectations: A Year in the Life of Starbucks’ Stock.”

The book is interesting on two levels. First, it details the history and business strategies of Starbucks, which has rapidly become one of the country’s most powerful brands. Second, it shows how the markets really work.

Blumenthal breaks the book into 13 chapters and an epilogue. Each chapter represents one of the months that she spent following Starbucks and its stock.

She details the company’s birth as a small coffee seller in Seattle, and how the vision of chairman Howard Schultz helped spread the company across the country. Increasingly, Starbucks is focusing its growth prospects on international markets, particularly China, and is branching out into the sales of music, movies and food.

Starbucks’ story itself is worth studying, but it’s Blumenthal’s detailed reporting about what makes the stock move that makes this book most original.

Like most companies, Starbucks is primarily focused on its business but greatly interested in a rising stock price. That leads to constant interactions between company executives and stock analysts.

Tiny differences between earnings expectations and reported earnings lead to huge swings in the stock price. A few percentage points in same-store sales comparisons make the difference between a bull or bear market in the stock.

Blumenthal covers the market from all angles, spending time with stockbrokers, institutional and small investors, analysts, company executives, coffee baristas, customers and shareholders.

All have a stake in the success of Starbucks.

The executives set the company’s goals and communicate them to the analysts. The analysts determine the likelihood that the executives’ vision will pan out. The stockbrokers decide whether to recommend the stock to investors, who in turn determine whether Starbucks should play a role in their portfolios. The baristas must make a mean latte, and the customers must decide whether to plunk down $4 or more.

Investors will come away with a good understanding of how Starbucks continues to grow, and a better idea of how the stock market really works.

That’s a grande achievement.

Permalink: http://news.fredericksburg.com/businessbrowser/2007/10/22/understand-starbucks-understand-the-market/

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