Will a Recent Event Affect Starbucks Stock?

With shares of Starbucks (NASDAQ:SBUX) trading around $80, 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, and 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 such as 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 last several years, which has generated a lot of buzz for its products.

Starbucks posted third-quarter earnings after the closing bell Wednesday, and the stock has slumped after Starbucks gave underwhelming guidance and reported that sales in Asia were down. Net income came in at 63 cents per share, beating the average estimate of 60 cents per share. Starbucks has been aggressively expanding into China, but the company only saw sales rise in the country 8 percent during the quarter, a 1 percent drop from last quarter. Starbucks has recently been attacked by Chinese state media, which alleged that the company charges more for its products in China than in America in a deliberate attempt to take advantage of the Chinese people.

T = Technicals on the Stock Chart Are Strong

Starbucks stock has been exploding to the upside in recent years. The stock is now trading at all time highs and looks poised 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 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

24.66%

16%

14%

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

November Options

Flat

Average

December 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 Q3

2013 Q2

2013 Q1

2012 Q4

Earnings Growth (Y-O-Y)

36.96%

27.91%

27.50%

14.00%

Revenue Growth (Y-O-Y)

12.81%

13.26%

11.26%

10.59%

Earnings Reaction

-1.03%*

7.61%

-0.82%

4.10%

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.

* As of this writing

P = Excellent 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

48.16%

43.01%

9.10%

50.77%

38.76%

Starbucks has been a relative performance leader, year-to-date.

Conclusion

Starbucks provides in-demand coffee and tea products and services to consumers around the world. The company has recently been attacked by Chinese state media, which alleged that the company charges more for its products in China than in America in a deliberate attempt to take advantage of the Chinese people. The stock has been exploding to the upside in recent years and is now trading at all time highs. Over the last four quarters, earnings and revenues have been increasing, which has pleased investors in the company. Relative to its peers and sector, Starbucks has been a year-to-date performance leader. Look for Starbucks to continue to OUTPERFORM.

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