Is it possible Starbucks (SBUX) is a victim of its own excellence when it comes to investor expectations? It seems that if the coffee company's stock does not keep going up, shock embraces its investors. Are expectations too high for this company?
Starbucks is a well admired company and considered a good investment by both investor and many analysts. Presently, Credit Suisse added Starbucks Corp to its U.S. focus list as "one of the most compelling opportunities" as identified by restaurant analyst Keith Siegner. But when the company posted disappointing earning results from the second quarter, analysts' confidence was apparently shattered. We all know how the stock dropped 10%. How significant was the drop? If one looks at a weekly chart, this recent drop is the first time the stock dipped below its 50 day MA since April of 2010. It was pretty significant.
I can understand the reaction from investors in a company that can "do no wrong." It is quite possible that Starbucks is that good! The company researches superior technology to run the business and is diligent about how it goes about opening up its markets. Take these two examples:
Latest Movement into Cash Free Payments
About a year ago, Starbucks introduced a pay-by-phone app for customers that has proven very popular as it does 1 million transactions a week. But some time before the year is over it will begin accepting payments through Square's mobile app. Let me paint a picture of what Starbucks envisions. Customers will be able to pay for their lattes with their phones as it charges the customer's card. But eventually it hopes to do away with having to use the phone completely. Imagine a "Square app system" whereby the app uses the phone's GPS to detect that you've walked into a Square-enabled retailer. You will walk into Starbucks, your picture will pop up on the register and you just introduce yourself and tell them what you want while your card is charged without taking your phone out. This is a pretty up and coming technology and Starbucks is at the forefront.
The Professionalism in China
Attitudes were skeptical that Starbucks could make a dent in China when it first entered the country back in the late 1990's. China was a nation of tea drinkers, not coffee, how would Starbucks enter this market? So Starbucks went to work researching how to crack the tough market. It found an emerging middle class that it could introduce this "western brand" of coffee to. It would create a social atmosphere where friends would come, drink their favorite beverage and chat. Evidently it worked. Now you can find a Starbucks almost on every major street of the coastal cities in China. How did they do it?
When it entered the Chinese market, Starbucks did not advertise or run promotions that could look like a western threat coming into a tea drinking market. Instead, it selected high visibility sights where "high-traffic" could see the Starbucks' brand. The next thing Starbucks did was to capitalize on the tea-drinking culture of Chinese consumers by introducing beverages using popular local ingredients such as green tea. The elegant atmosphere created by the interior design appealed to the younger generation who always had an interest in western culture. Starbucks became a symbol of success for the up and coming younger middle class.
The start of the cash free payment system and the example of how Starbucks entered the Chinese market are two examples of the excellence the company stands for and what investors have come to expect. This "can do no wrong" company fell hard when investors found out it was mortal. (lowered growth expectations)
Has Starbucks been over priced for awhile?
As mortals would do (in this economic environment) the coffee retailer cut its profit target for the current quarter and issued a fiscal 2013 outlook that fell well short of the consensus forecast. This is what caused the steep drop in July. Its no secret that consumer spending in Western Europe is decimating the coffee maker's profits. But sales are also slowing here in the U.S. Quite possibly the "correction" investors have been feeling may be what the stock needs right now.
After what has amounted to a 5 month bearish move topped off by a nice downward gap, Starbucks is trying to rally with the market. From a low point just under 44, it has clawed its way back up to just over 48. I would not call this a long term rally though. There is a very important resistance point coming down to about 50.4 that I would want to see the stock push through on strength to determine the length of this rally. It looks like it is attempting to fill an old gap but has also appeared to have reached a top. The market as a whole is in a rally and Starbucks may continue to move up a few more points. But I do not expect a huge rally here. I am going to go with the trend and create a bear put spread play here.
The Options Play
- Buy a January 2013 put with a strike of '38' (priced at $3.60)
- Sell a January 2013 put with a strike of '37' (priced at $3.05)
- Net Debit to Start: $0.55
- Maximum Profit: $0.45
- Maximum Risk: net debit
- Maximum Length of Trade: 5 months
Reasoning behind the Trade
- End of the year forecast lowered does not create an overwhelming desire to push the stock up.
- Play the bearish trend.