Is Starbucks a Hot Stock?

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.

Starbuck is partnering with Oprah Winfrey to push its tea sales — because if anyone can make tea happen, Oprah can. The media mogul and the CEO of the world’s largest coffee chain clinked cups at the company’s annual meeting on Wednesday, Reuters reported, and it was there that Starbucks announced it will debut a new tea-based drink created by Winfrey called “Oprah Chai.” The new brew will go on sale at Starbucks and Teavana stores in the U.S. and Canada on April 29.

Fans of Winfrey know that she is a tea enthusiast, and Starbucks chose to partner up with the celebrity and have her brew her own brew. According to Reuters, the Seattle-based chain is looking to push its tea offerings now that the coffee market is so saturated, and it sees no better way to do it than to enlist Winfrey for its team. The celebrity developed her tea with Teavana’s teaologist Naoko Tsunoda and Reuters reports that it is a blend of tea infused with cinnamon, ginger, cardamom, and cloves. It will be sold in tins or as prepared tea lattes.

T = Technicals on the Stock Chart Are Strong

Starbucks stock has been exploding to the upside in recent years. 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 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

21.48%

10%

8%

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

April Options

Flat

Average

May 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 small 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?

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), Keurig Green Mountain (NASDAQ:GMCR), and sector?

Starbucks

Dunkin’ Brands

McDonald’s

Keurig Green Mountain

Sector

Year-to-Date Return

-1.40%

9.09%

-0.19%

49.34%

3.50%

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. The company announced it will debut a new tea-based drink created by Oprah Winfrey called “Oprah Chai.” The stock has been exploding to the upside in recent years and is currently surging 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. Look for Starbucks to OUTPERFORM.

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.

More From Wall St. Cheat Sheet: