Is Starbucks a Solid Investment?

With shares of Starbucks (NASDAQ:SBUX) trading around $72, 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 Coffee Company has announced a new leadership structure that will allow CEO Howard Schultz to focus on “innovation and next generation retailing and payments initiatives,” according to a company press release. ”These organizational moves map our internal talent to the rapidly evolving retail environment and significant strategic and market opportunities ahead of us,” Schultz said. “Each of these experienced Starbucks leaders will be working closely with the entire senior leadership team, and me, to bring even greater financial and operational discipline to our business around the world. They will partner with me as I focus on Starbucks mission, growth initiatives and the convergence and integration of our retail and e-commerce, digital, card and mobile assets around the world. There has never been a more exciting time to be a Starbucks partner.”

T = Technicals on the Stock Chart Are Mixed

Starbucks stock has been exploding to the upside in recent years. However, the stock is currently trading sideways and may need time to consolidate before heading higher. 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 signal neutral 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

23.32%

20%

18%

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

Put IV Skew

Call IV Skew

February Options

Average

Average

March Options

Average

Average

As of today, 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 minimal 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’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 had conflicting feelings about 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

-8.73%

-4.36%

-3.48%

3.23%

-2.33%

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 has announced a new leadership structure that will allow CEO Howard Schultz to focus on “innovation and next generation retailing and payments initiatives.” The stock has been exploding to the upside in recent years but is currently trading sideways. Over the last four quarters, earnings and revenues have been increasing. However, investors have had conflicting feelings 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.

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