Is Starbucks a Healthy Stock for Your Portfolio?

With shares of Starbucks (NASDAQ:SBUX) trading around $76, is SBUX an OUTPERFORM, WAIT AND SEE, or STAY AWAY? Let’s analyze the stock with the relevant sections of our CHEAT SHEET investing framework:

T = Trends for a Stock’s Movement

Starbucks is a roaster, marketer, and retailer of coffee operating worldwide. The company purchases and roasts the coffees it sells along with handcrafted tea and other beverages, as well as a variety of fresh food items through its stores. Starbucks sells a variety of coffee and tea products and licenses its trademarks through other channels like stores and national food service accounts. In addition to its flagship Starbucks brand, the company’s portfolio features Tazo Tea, Seattle’s Best Coffee, Starbucks VIA Ready Brew, Starbucks Refreshers beverages, and the Verismo System by Starbucks. Starbucks has developed a solid reputation over the past several years, which has generated a lot of buzz for its products.

Starbucks wants to get in with the lunch crowd. The coffee giant announced Monday a new line of handcrafted sodas. The company said that Fizzio sodas will hit about 3,500 Starbucks stores in the southern U.S. and Hawaii starting Tuesday. That includes the Los Angeles, San Diego, Stockton, and Modesto areas, as well as in Arizona. The carbonated concoctions come in three flavors: spiced root beer, ginger ale and lemon ale, made without artificial flavors, preservatives or high-fructose corn syrup.

“We have heard from our customers that they’re looking for more refreshing, cold beverages, especially during the warm summer months,” said Cliff Burrows, president of the Americas region. The global coffee chain is also testing new sandwiches and said it will be adding more lunchtime options to compete with other chains such as Dunkin’ Donuts (NASDAQ:DNKN). Burrows said prices for the new carbonated sodas will vary by location. A medium-sized Fizzio soda will cost $2.95 in Los Angeles. By this time next year the company expects the sodas to be in every store across the country. The chain currently has about 11,600 U.S. locations. Starbucks also sells Evolution Fresh juice, La Boulange pastries and Teavana tea, and analysts say tapping into the handcrafted drink trend could be another specialty beverage win for the company.

T = Technicals on the Stock Chart Are Strong

Starbucks stock has been moving higher in recent times. However, the stock is currently pulling back and may need time to stabilize. Analyzing the price trend and its strength can be done using key simple moving averages. What are the key moving averages? The 50-day (pink), 100-day (blue), and 200-day (yellow) simple moving averages. As seen in the daily price chart below, Starbucks is trading above its rising key averages which signal neutral to bullish price action in the near-term.

SBUX

(Source: Thinkorswim)

Taking a look at the implied volatility (red) and implied volatility skew levels of Starbucks options may help determine if investors are bullish, neutral, or bearish.

Implied Volatility (IV)

30-Day IV Percentile

90-Day IV Percentile

Starbucks options

18.24%

80%

78%

What does this mean? This means that investors or traders are buying a very significant amount of call and put options contracts, as compared to the last 30 and 90 trading days.

Put IV Skew

Call IV Skew

July Options

Flat

Average

August Options

Flat

Average

As of today, there is an average demand from call buyers or sellers and low demand by put buyers or high demand by put sellers, all neutral to bullish over the next two months. To summarize, investors are buying a very significant amount of call and put option contracts and are leaning neutral to bullish over the next two months.

On the next page, let’s take a look at the earnings and revenue growth rates and the conclusion.

E = Earnings Are Increasing Quarter-Over-Quarter

Rising stock prices are often strongly correlated with rising earnings and revenue growth rates. Also, the last four quarterly earnings announcement reactions help gauge investor sentiment on Starbucks’s stock. What do the last four quarterly earnings and revenue growth (Y-O-Y) figures for Starbucks look like and more importantly, how did the markets like these numbers?

2014 Q1

2013 Q4

2013 Q3

2013 Q2

Earnings Growth (Y-O-Y)

9.8%

24.56%

36.96%

27.91%

Revenue Growth (Y-O-Y)

8.94%

11.78%

12.81%

13.26%

Earnings Reaction

0.5%

2.17%

0.27%

7.61%

Starbucks has seen increasing earnings and revenue figures over the last four quarters. From these numbers, the markets have been pleased with Starbucks’s recent earnings announcements.

P = Average Relative Performance Versus Peers and Sector

How has Starbucks stock done relative to its peers, Dunkin’ Brands (NASDAQ:DNKN), McDonald’s (NYSE:MCD), Keurig Green Mountain (NASDAQ:GMCR), and sector?

Starbucks

Dunkin’ Brands

McDonald’s

Keurig Green Mountain

Sector

Year-to-Date Return

-2.13%

-10.00%

4.79%

61.76%

-1.44%

Starbucks has been an average performer, year-to-date.

Conclusion

Starbucks provides in-demand coffee and tea products and services to consumers around the world. The company announced Monday a new line of handcrafted sodas that will hit about 3,500 Starbucks stores in the southern U.S. and Hawaii starting Tuesday. The stock has been moving higher in recent times, but is currently pulling back. Over the last four quarters, earnings and revenues have been increasing, which has left investors pleased. Relative to its peers and sector, Starbucks has been an average year-to-date performer. Look for Starbucks to OUTPERFORM.

Let’s analyze the stock with the relevant sections of our CHEAT SHEET investing framework:

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