Why It's a Great Time to Short Starbucks

Includes: DBA, SBUX
by: Tom Guttenberger

Agriculture prices surging and a weak domestic labor market are two macroeconomic themes that are not going away anytime soon. Being the case, why not kill two birds with one stone?

Yes, that's right. I'm suggesting shorting Starbucks (NASDAQ:SBUX).

From the November 2008 low to the June 2010 high SBUX made a 400% move. To me this is a headscratcher. Currently SBUX is trading a a ~21 PE multiple. Most of its competitors in the coffee and fast food industry are around 15. This is all in an enviroment where U.S. consumers are looking for less expensive alternatives.

Was the move in SBUX partially propelled by soft coffee prices? Sure. But you can bet that that is over now. I've learned that trends are very tough to fight in commodities markets, and now coffee prices are surging. Additionally with the massive monetary stimuluses and increasing meat consumption in China and India, fundamently, agriculture prices (coffee included) should be in store for a major secular bull market.

As for the company itself, they have done a good job of cutting costs over the past year. While this does help the bottom line in the near term, to me it screams weakness. The main result of the cost cuts were shutting down underperforming stores...weakness. I don't think the company will ever be able to regain the same "in vogue" brand it had in the late 90's, therefore removing the growth catalyst and making continued expansion in international markets all the more difficult.

Let's take a look at the chart now. After the June 2010 high, it has contiuned to make lower highs and lower lows. Now that it is approaching those lower highs I think it is a fine time to get short. Also if you take a look at the 10 year chart, this longer term high is running into the old trough made in mid-2005.

click to enlarge

Disclosure: No positions