Tuesday, September 18, 2012

SBUX: Game of Cappuccinos

Starbucks Corp. (SBUX), the company that seemingly holds the ambition to put a coffee shop on every block, and sometimes more than one, has ended a near-term rise that began Aug. 2 at $43.04.

It poked above its 20-day high of $48.62  on Aug. 24, moving into Turtle Trading bull phase, peaked at $52 on Sept. 14 and dropped sharply that day, and on Monday tumbled below its 10-day low of $49.05, ending the Turtle bull phase.

(See my explanation of Turtle Trading here.)

A lot of stocks are retreating from highs this week. A few weeks back, I was dealing with several Turtle bull signals each day. But the Turtle has gone into a quiet slumber. A spot check of high-volume stocks found few that, like SBUX, have moved out of bull phase, but they're moving in that direction.

If SBUX falls below $47.01, then that will produce a Turtle bear signal. I've set an alert.

SBUX has been in a bear trend since April 16, when it hit an all-time high of $62. The August-September rise was within that larger decline, and it failed to exceed even the July high of $54.28. The pattern is low - lower high - ????, the question marks being whether the price will indeed fall below $43.04, setting a lower low and showing a full three-leg pattern for the downtrend.

Analysts have been losing enthusiasm for SBUX over the past three months. The enthusiasm index has fallen from 46% to 31%. Now 31% isn't awful, but a drop of that magnitude is a negative sign amid a large pool of positive sentiment, like the first falling leaves of late summer whispering, "Winter is coming."

When it comes to financials, the Game of Cappuccinos has chops: Return on equity of 27%, and debt standing at only 10% of equity. This is a growth stock by those measures.

Starbucks' annual earnings have been on a steady rise since the 2009 recession low -- growth stock -- and the peak quarter, the 1st, has exceed its prior year's counterpart in 2011 and 2012.

Eleven of the last 12 quarter have shown upside earnings surprises, and one -- the most recent, reported July 26, surprised to the downside by 5.1%.

Institutions own 75% of shares, and despite the decline the price remains high. It takes $2.91 in shares to control a dollar in sales.

SBUX on average trades 7.3 million shares a day and supports a wide selection of option strike prices. Open interest runs in the four- and five-figures near the money, and the bid/ask spread for front-month at-the-money calls is a miniscule 1.3%.

Implied volatility is at 27%, near the low end of the six-month range. It has been stair-stepping lower for much of September, although it did set a slightly higher high on Monday.

Options are pricing in 68.2% confidence that trades will fall between $45.35 and $53.07 over the next month, for a potential maximum gain or loss of 8%.

Options trading is slow, running at 87% of their five-day volume. Calls lead at 104% of volume, compared to 70% for puts.

Today's fair-price zone runs from $49.10 to $49.42, encompassing 68.2% of transactions surrounding the most traded price, $49.26. The stock is trading within the range with 2-1/2 hours to go before the close.

Starbucks next publishes earnings on Nov. 1. It goes ex-dividend in November for a quarterly distribution yielding 1.38% annualized.

Decision for my account: I'm not trading SBUX today but am waiting for the Turtle bear signal. At this point I'm fully committed under my trade sizing rules, so I'll need to have a few positions closed before making the trade, if the break below the 20-day low actually occurs.

Tim Bovee, Private Trader tracks the analysis and trades of a private trader for his own accounts. Nothing in this blog constitutes a recommendation to buy or sell stocks, options or any other financial instrument. The only purpose of this blog is to provide education and entertainment.
No trader is ever 100 percent successful in his or her trades. Trading in the stock and option markets is risky and uncertain. Each trader must make trading decision decisions for his or her own account, and take responsibility for the consequences.

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