Is an Outperform in Starbucks’s Future?

With shares of Starbucks (NASDAQ:SBUX) trading around $73, 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 has a tight grip over the coffee industry, but Wired published a report Tuesday that illuminates the company also has an increasingly solid grasp on another sector that also significantly affects consumers: the banking one. The idea of the Starbucks card and virtual payment is no longer foreign to anyone, but Wired pointed out earlier this week that thanks to the current situation of the banking industry — a division that has seen better days — the coffee company has an increased opportunity to have a tighter hold over its customers and facilitate more bank-like transactions that consumers may be oblivious to.

Wired starts out its report by making the argument that in this day and age, you likely make more trips to Starbucks than your local bank branch, and it’s probably right. Then, it brings up the idea of Starbucks’s pre-paid cards, or “loyalty cards.” These can act as savings accounts and put Starbucks in charge of a lot of your money — an amount that banks could even be envious over. At this point, Starbucks’s prepaid cards represent two traditional banking functions now being handled by the coffee chain — payments and storing money.

T = Technicals on the Stock Chart Are Mixed

Starbucks stock has been exploding to the upside in recent years. The stock is currently moving higher and looks set to continue. 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 below its rising key averages which signal neutral to bearish 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

23.42%

60%

58%

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

Put IV Skew

Call IV Skew

April Options

Steep

Average

May Options

Steep

Average

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

2013 Q4

2013 Q3

2013 Q2

2013 Q1

Earnings Growth (Y-O-Y)

24.56%

36.96%

27.91%

27.50%

Revenue Growth (Y-O-Y)

11.78%

12.81%

13.26%

11.26%

Earnings Reaction

2.16%

0.27%

7.61%

-0.82%

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 = Weak Relative Performance Versus Peers and Sector

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

Starbucks

Dunkin’ Brands

McDonald’s

Green Mountain Coffee Roasters

Sector

Year-to-Date Return

-7.12%

7.18%

-1.73%

43.63%

11.49%

Starbucks has been a poor relative performer, year-to-date.

Conclusion

Starbucks provides in-demand coffee and tea products and services to consumers around the world. Wired published a report on Tuesday that illuminates the company has an increasingly solid grasp on banking. The stock has been exploding to the upside in recent years and is currently moving higher. Over the last four quarters, earnings and revenues have been increasing, which has left investors pleased about recent earnings announcements. Relative to its peers and sector, Starbucks has been a poor year-to-date performer. WAIT AND SEE what Starbucks does this quarter.

Using a solid investing framework such as this can help improve your stock-picking skills. Don’t waste another minute — click here and get our CHEAT SHEET stock picks now.

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