Coffee giant stays caffeinated
12/06/17

How would you like to be in a business with a strong foothold in one of the world’s largest potential markets for your product, which just happens to be one of the most popular food items on the planet—and which is gaining greater acceptance for its wide range of health benefits?

That is the seemingly enviable position of coffee colossus Starbucks (SBUX). While the company conquered the US a while ago (insert your favorite Starbucks-inside-the-bathroom-of-another-Starbucks joke here), folks keeping score at home are wise to remember that not every corner of the planet has experienced similar saturation.

One of those “corners” just happens to be China. Another is India. Two traditional tea cultures that have been upping their coffee intake as their middle classes expand.

Although one must consider the source, the International Coffee Organization (ICO) in 2015 forecast a 25% increase in global coffee consumption by 2020, driven in large part by growing demand in China and India.1

While coffee consumption in India appears to be lagging that in China, as of last year, the US Department of Agriculture (USDA) reported that Chinese coffee consumption had nearly tripled during the previous four years.2 So far, so good.

Starbucks, although it faces competition in the Middle Kingdom, has not been idle. It already has 3,000 stores in China and is shooting for 10,000 within a decade. Same-store sales in China increased 8 percent in the most recent quarter.3

As an added bonus, recent years have seen a steady stream of research confirming myriad health benefits of daily coffee consumption—everything from battling dementia to increasing lifespan.4

Starbucks (SBUX), 4/18/2011 – 12/5/17

Source: OptionsHouse

Nonetheless, SBUX has been trading in a broad range from roughly $52 to $64 since late 2015. But the stock has been percolating since testing the range bottom in August, and over the past month it has engaged in some classic basing-and-breakout action.

The daily chart below shows that after gapping down after its late-July (in-line) earning release, SBUX moved sideways for the better part of three months before busting out of the top of this range in early November. It then formed a tighter, shorter consolidation that pulled back just below the level of the prior trading range’s high before swinging higher and breaking out to the upside again with a 2.5% rally on Monday, and tacking on another 1%-plus yesterday.

Starbucks (SBUX), 3/8/17 – 12/5/17

Source: OptionsHouse

This latest upswing took the stock a little above the midpoint of the long-term trading range (a level, admittedly, that turned back a couple of upswings in 2016), to around $59.50, halfway through yesterday’s trading.

When trading, most market pros will tell you to consider more than just the long-term fundamental story, though. And in this case, SBUX has shown a pretty consistent tendency of pulling back for a few days after the type of run-up that concluded yesterday. (Consider, as just one recent example, the consolidation and dip that followed the stock’s upside burst in early November.)

For instance, if we look at what happened after SBUX posted back-to-back days of 1.25%-3% that were also at least 30-day new highs (like yesterday), the stock pulled back around 1% on average after three days, at which point prices turned to the upside.

Food—or rather, drink—for thought.

 

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Time. Global Coffee Consumption Projected to Soar Over Next Five Years. 2/17/15.

2 BBC.com. China’s lucrative caffeine craze. 6/29/16.

3 Reuters. China's budding coffee culture propels Starbucks, attracts rivals. 12/5/17.

CNN.com. Drinking more coffee leads to a longer life, two studies say. 7/12/17.