Want Alpha? Buy Quicksilver Resources, Sell Starbucks

Includes: KWK, SBUX
by: Giovanni DiMauro

In seeking alpha, one always looks for opportunities to maximize profits while limiting downside risk. I believe this is a play that could yield significant gains for the coming year.

Starbucks Corporation (NASDAQ:SBUX) is currently trading around 35x earnings. They have had a tremendous run over the last several years and are priced to perfection. That means there is no room for error. Here's the deal, coffee futures are at a low. While coffee prices have been on a steady decline; Starbucks' profit and stock price has been on a steady rise, over 1100% in 5 years.

I believe this will soon reverse, Starbucks' share price will correct, and coffee prices will rise; putting a damper on the company's profit margin. Here is a weekly chart, it's easy to see a possible pullback to my target of $56.

(Click to enlarge)

One can see the correlation, with falling coffee prices have come increased profit margin. If you remember a few years ago, Starbucks raised their prices as coffee was skyrocketing; when coffee prices came down it contributed significantly to the bottom line. It's Important to note that Starbucks did not lower their prices for a cup of coffee.

Look at this monthly chart of coffee futures.

(Click to enlarge)

Bottom line: Time to take profits on Starbucks, sell into any strength above $80. I believe investors will see a pullback to the $56 range.

Buy Quicksilver Resources INC. (NYSE:KWK), it is breaking out with huge upside potential.

Quicksilver Resources Inc. is an exploration and production company engaged in the development and production of long-lived natural gas and oil properties onshore North America. Based in Fort Worth, Texas, the company is widely recognized as a leader in the development and production from unconventional reservoirs including shale gas and coal bed methane.

Quicksilver is a turnaround company in the process of deleveraging their balance sheet. While painful; it's the right thing to do for shareholders and long-term growth. Quicksilver was a private company for 30 years before going public in 1999 on the NYSE. They have experienced management and are committed to responsibly growing the company and believe that a lower debt load and strategic partnerships with various joint ventures will bring windfall profits soon.

My first price target for this stock is $5.50. I believe it could triple by year end.

Here is a 240 week chart.

(Click to enlarge)

The recent cold spell that has hit the nation has the price of natural gas on the rise. As of 12/19, January futures were trading at $4.46, up 4.9% on from the previous day. Prices are approaching 2011 highs, which bodes well for the industry.

You can view this information on the EIA website by clicking here.

(Click to enlarge)

The company recently partnered with Tokyo Gas, a Japanese company that is shelling out the first 25 million of a JV (joint venture) project, for a 50% revenue share. This strategy allows Quicksilver to keep operating cost down and have the ability to drill more wells, while limiting their financial expenditures.

Big projects on the horizon

  • Barnett Shale
  • Fort Worth Basin
  • The Horn River Basin

I encourage investors to read my research report on Why Quicksilver is a buy. You will find a more detailed analysis by clicking here.

Short squeeze?

Starbucks has less than a 1% short interest in the stock. It is widely held and therefore susceptible to profit taking.

Quicksilver has a 32% short interest in the stock with 29.6M shares short. Based on current on current volume it would take 10 days to cover. This is a decrease of 2%, I believe shorts are trapped right now and getting very nervous. Quicksilver has many positive developments in the works, and any positive news can send this stock screaming higher. You can find short interest information on any stock by clicking here.


Going long Quicksilver Resources Inc and shorting Starbucks Corp may be an ideal trade to maximize your portfolio's gains in the New Year. As always, do your own research, make unemotional decisions and be sure to have an exit strategy in place before you make any investment.

Disclosure: I am long KWK. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article. I am shorting SBUX any time I see fit.