Thursday, March 7, 2013

SBUX: A bullish brew

Update: SBUX crossed the lower 10-day price channel boundary, $56, on March 19 and was closed for a 3.1% loss.

Starbucks Corp. (SBUX) has broken above its 20- and 55-day price channels, sending a bull signal and continuing an uptrend that began in July from $43.04 and that has carried the price to today's high, so far, of $57.79.

The break above the $56.80 channel boundary is the 18th to the upside since the broad markets began their post-recession recovery in early 2009. Of the 17 prior breakouts, 52.9% have been profitable, with an average return of 12%.

Adjusting the return by the success rate produces a score of 6.4%, well above my minimum 5% preference.

The breakout keeps alive the possibility that SBUX will challenge its all-time high of $62 recorded in mid-April 2012.

There have been two beakouts since the uptrend began last July, and both were successful, with an average return of 3.5%.

Starbucks' signature coffee shops are ubiquitous and global. The company, headquartered in Seattle, Washington, operates or licenses more than 18,000 stores in 60 countries.

Analysts collectively give SBUX at 44% enthusiasm rating, which is fairly amazing, actually, for a company that seemingly already has a store on every other corner.

Starbucks is indeed a money maker. Each of the last 12 quarters has shown a profit, with the annual peak tending to come in the 1st quarters (think dreary autumn in the northern hemisphere, where nothing is better than sitting indoors with a cup of warm brew).

The peak-quarter earnings are accelerating year over year, and the same is true of the off-peak quarters.

Starbucks has surprised to the upside in 10 of the last 12 quarters, and to the downside, twice.

The company reports a high return on equity of 28% with very low debt at just 11% of equity. That makes it a potential growth stock by my criteria.

Institutions own 71% of shares, and the price has been bid up to a high level. It takes $3.13 in shares to control a dollar in sales.

SBUX on average trades 5.7 million shares a day and has a wide selection of option strike prices with open interest near the money in the four- and five-figures.

Front-month at-the-money call options have a narrow bid ask spread, 1.1%.

Implied volatility stands at 23% , near the bottom of the six-month range, and has been declining since late February.

In the following analysis I use the statistical concept of a standard deviation, boundaries that encompass 68.2% of trades surrounding a reference price.

Options are pricing in confidence that 68.2% of trades will fall between $53.79 and $61.61 over the next month, for a potential gain or loss of 6.8%, and between $55.82 and $59.58 over the next week.

Options today are showing signs of bullish speculation, with calls trading 33% above their five-day average volume, and puts trading 1% above average.

The fair-price zone on today's 30-minute chart ranges from $57.33 to $57.75, encompassing 68.2% of transactions surrounding the most-traded price, $57.55. The stock is well on its way to establishing a new most-traded price around $57.68 and is trading above the zone after 90 minutes of trading.

Starbucks next publishes earnings on April 25. The stock goes ex-dividend in May for a quarterly payout yielding 1.46% annualized at current prices.

Decision for my account: I've opened bull position in SBUX, structuring it as a bull put spread expiring in April, short the $55 puts and long the $52.50 puts. The position is profitable down to $54.60, a dollar below the initial stop/loss. It has a maximum yield of nearly 14%, a bit less than I like.


My trading rules can be read here.  A discussion of recent modifications to my trading methods, which haven't yet been incorporated in the original write-up, can be found here.

And the classic Turtle Trading rules on which my rules are based can be read here.

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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