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SBUX: Short Sell Opportunity Of A Life Time

|Includes: Starbucks Corporation (SBUX)

My valuation on Starbucks (NASDAQ:SBUX) is a strong sell as I believe their market price is over inflated and providing one of the best short selling opportunities of the decade. Using the Graham Value formula for intrinsic value (V*)=normalized EPS*(7.5+1.5g)*(4.4/20yr Corp A Bond Rate), one could put an intrinsic value of $21.30 on Starbucks, and with its current market price of $53.22 could provide one with a potential 60% return. To cross examine this valuation I used the Joel Greenblatt valuation model and received a fair value of $23, also producing a potential return of 57%. Since both valuation models gave me similar results gives me increased certainty of my position.

Without looking into the company's intrinsic value Starbuck's has some impressive financial point's to highlight. Taking a look inside to management all insiders own 2.43% of the company which is relatively high as most insiders own less than 1% of their company. With storied CEO Howard Shultz owning a staggering 2.37% of the company gives him great incentive to increase the share price, which is exactly what he has done and possibly why their market price is so over valued compared to their intrinsic value.

Looking at Starbucks financials, they are yielding a 28% return on equity,a 1.6 quick ratio, an expected 19% 5 year EPS growth rate on $1.73 a share with 758 million shares outstanding. Starbucks is also only trading at 3.6X sales and has a price to earnings growth rate of 1.57 with an attractive dividend of 1.3% or $0.68 a share giving them a 36.18% payout ratio. With net debt to EBITDA being only -0.5, gives this firms equity only a slight risk. Starbucks also has been able to consistently produce shareholders with earnings, giving them a 7% earning yield (earning yield=EBITDA/enterprise value).

Starbucks has additional red flags as well beginning with its price to book ratio of 7.74, price to free cash flow of 86.1, and most importantly its price to earning's ratio of 30. An established company as Starbucks should be nearing the average P/E of ~15 and if this were the case, they would be trading near Graham's intrinsic value of $21.30. Starbucks also has a gross margin of 23% and using Buffet's rule of thumb of 40% and higher gross margins gives a firm a durable competitive advantage, and below 40% shows the firm has a diminishing competitive edge, shows Starbuck's no longer has a competitive pricing advantage over competitors they once had. Starbucks is also currently trading at 17x their EBITDA putting them in the realm of overvalued.

I would compare Starbucks to First Solar(FSLR) and Green Mountain Coffee(GMCR), who also became highly over valued compared to the Graham and Greenblatt models, and quickly crashed back to Earth.

I believe Starbucks stock reached the highest they will ever go in mid-April at $62 and with only a 1% short float gives today a great entry point to short the stock. For the next few months I would expect the stock to move horizontal from its current price of $52 and then moderately begin its decline to roughly $30 by years end.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.