Can Starbucks Break Out?

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With shares of Starbucks (NASDAQ:SBUX) trading around $58, is SBUX an OUTPERFORM, WAIT AND SEE or STAY AWAY? Let’s analyze the stock with the relevant sections of our CHEAT SHEET investing framework:

T = Trends for a Stock’s Movement

Starbucks is a roaster, marketer and retailer of coffee operating in 60 countries. The company purchases and roasts coffees that it sells, along with handcrafted coffee, tea and other beverages and a variety of fresh food items, through company-operated stores. It also sells a variety of coffee and tea products and licenses its trademarks through other channels, such as licensed stores and national food service accounts. Through its stores and other channels, Starbucks is able to provide the convenient items that many consumers around the world are demanding.

T = Technicals on the Stock Chart are Strong

Starbucks has seen a long-term uptrend over the last couple of decades. Like many stocks, it did suffer during bad economic times but has recovered. Starbucks stock is now trading near all-time high prices. Analyzing the price trend and its strength can be done using key simple moving averages. What are the key moving averages? The 50-day (pink), 100-day (blue), and 200-day (yellow) simple moving averages. As seen in the daily price chart below, Starbucks is trading below all of its rising key averages which signal bullish price action in the near-term.

SBUX

(Source: Thinkorswim)

Taking a look at the implied volatility (red) and implied volatility skew levels of Starbucks options may help determine if investors are bullish, neutral, or bearish.

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What does this mean? This means that investors or traders are buying a very significant amount of call and put options contracts, as compared to the last 30 and 90 trading days.
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As of today, there is an average demand from call buyers or sellers and low demand by put buyers or high demand by put sellers, all neutral to bullish over the next two months. To summarize, investors are buying a very significant amount of call and put option contracts and are leaning neutral to bullish over the next two months.

E = Earnings Are Increasing Quarter-Over-Quarter

Rising stock prices are often strongly correlated with rising earnings and revenue growth rates. Also, the last four quarterly earnings announcement reactions help gauge investor sentiment on Starbucks’s stock. What do the last four quarterly earnings and revenue growth (Y-O-Y) figures for Starbucks look like and more importantly, how did the markets like these numbers?

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Starbucks has generally seen increasing earnings and revenue over the last four quarters. From these figures, the markets have been very pleased with Starbucks’s last two earnings announcements.

P = Poor Relative Performance Versus Peers and Sector

How has Starbucks stock done relative to its peers, Dunkin Brands (NASDAQ:DNKN), McDonald’s (NYSE:MCD), Green Mountain Coffee Roasters (NASDAQ:GMCR), and sector?

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Starbucks has been a relative underperformer year-to-date.

Conclusion

Starbucks provides products that have received a heavy rise in demand, around the world, over the last few years. The demand for its products has consistently increased earnings and revenue which has led investors to bid the stock near all-time high prices. However, Starbucks has been underperforming its strong peers and sector. Look for Starbucks stock to OUTPERFORM.

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