Does Starbucks Have the Potential for New Highs?

With shares of Starbucks (NASDAQ:SBUX) trading around $75, 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, which has offered company stock to store workers for more than two decades, will now begin picking up most of the tab for workers to get a degree through Arizona State University online. Starbucks employees who work at least 20 hours per week and enroll in the university’s online bachelor’s degree will get $6,500, about half of their tuition, for the first two years, the company said in a statement. They will then get full tuition for the final two years. The company previously offered as much as $1,000 a year in tuition reimbursement for employees who had worked at Starbucks at least one year.

T = Technicals on the Stock Chart Are Strong

Starbucks stock has been moving higher in recent times. The stock is currently surging higher and looks set to continue this path. 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 between its rising key averages, which signals neutral price action in the near-term.

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

17.07%

6%

4%

What does this mean? This means that investors or traders are buying a small 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

Average

Average

August Options

Average

Average

As of Monday, there is an average demand from call and put buyers or sellers, all neutral over the next two months. To summarize, investors are buying a small amount of call and put option contracts and are leaning neutral 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 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 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), and Keurig Green Mountain (NASDAQ:GMCR) –and sector?

Starbucks

Dunkin’ Brands

McDonald’s

Keurig Green Mountain

Sector

Year-to-Date Return

-4.31%

-8.65%

4.01%

58.74%

-1.23%

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 will now begin picking up most of the tab for workers to get a degree through Arizona State University online. The stock has been moving higher in recent times and looks set to continue this path. 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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