It’s been one of 2016’s strangest stock market trends: The companies with the lowest concentration of hedge-fund ownership have been among the market’s best performers. (For more about this trend, read Fortune’s feature, How Hedge Funds Turned Toxic for Stocks.) More than 100 hedge funds currently invest in Starbucks (SBUX), but their stakes are so small that they add up to less than 3% of the company. And you can hardly blame them for trying to get exposure to Starbucks’ high, consistent growth.
Even as Starbucks has been expanding aggressively in recent years—adding 1,677 stores in fiscal 2015 for a total of 23,043 in 68 countries—it’s striving to make its coffee shops more attractive and efficient. It has grown its same-store sales: 7% on average over the past five years, compared with a rate of 4.6% for the coffee- and snack-shop industry, according to IbisWorld. “Existing stores are becoming larger and more productive over time,” says Dan Davidowitz, chief investment officer and portfolio manager at Polen Capital, overseeing $9 billion in assets. And Starbucks is applying its methods to make each new store it opens better than the last. “We do not believe the company is nearing saturation, because its new stores are more profitable and have higher returns on investment than ever before,” Davidowitz adds.
The company has been increasing foot traffic with heartier food options (and a loyalty rewards program) and using its app and mobile-ordering feature to speed up service. Starbucks has room to open 5% more stores a year in the Americas and “much more than that in Europe and Asia, which are still very underpenetrated,” Davidowitz says. While he thinks Starbucks’ EPS growth could slow from the 30% it has averaged for the past five years, he still expects earnings to more than double by 2021, “enough conservatively estimated to get us to a strong double-digit return.” It also pays a dividend yielding more than 1%.
More from the Fortune Midyear Investor’s Guide:
• When Hedge Funds Are Toxic for Stocks
• 6 Stocks You Should Own Because Hedge Funds Don’t
• 3 ‘Hedge-Fund Favorite’ Stocks to Avoid
A version of this article appears in the June 1, 2016 issue of Fortune with the headline “Seven Stocks to Buy Right Now.”
