Coffee talk
01/31/19

●As Howard Schultz mulls presidential bid, SBUX approaches all-time highs

●Stock rallied more than 45% from June-November 2018

●Company’s China strategy looms large in growth outlook


 

If you stopped by a Starbuck’s (SBUX) recently for a cup of joe and a chat with a friend, perhaps a topic of conversation was former CEO Howard Shultz’s possible 2020 presidential bid. (Uh-oh: Danger of political discussion—abort, abort!)

Schultz’s public musings over higher office have, in recent days, probably overshadowed more important Starbucks-related news, at least for traders: The reinvigorated uptrend in SBUX shares.

The stock is just a sip away from matching the all-time high of $68.98 it made on November 8, having rallied a little above $68 yesterday, which is close enough for some traders to consider it a de facto test of that resistance level:

Starbuck’s (SBUX), 10/29/18–1/30/19. Starbuck’s (SBUX) price chart. Percolating prices.

Source: Power E*TRADE


The chart also shows the stock got an extra jolt of caffeine after its last two earnings releases, the most recent one just five trading days ago on January 24.

The slightly longer-term chart below shows that after falling to a nearly three-year low last June, SBUX rattled off a 46% rally into November—trouncing the S&P 500 (SPX) during that period and suffering a much milder December pullback. (The November high also pushed the stock out of a broad three-year trading range, at least temporarily.)

Starbuck’s (SBUX) and S&P 500 (SPX), 6/28/18–1/30/19. Starbuck’s (SBUX) and S&P 500 (SPX) price chart. Good buzz during hard times.

Source: Power E*TRADE


But the stock’s rebound since the December 24 lows has trailed the SPX by about a percentage point, which raises the question of whether the current upswing has the potential to be of venti proportions.

By most accounts, the Starbucks growth plan hinges on China, where the company is currently opening stores at a 1.5-per-day pace, with a goal of having 6,000 outlets by 2022.1

That’s a lotta joe, but as some analysts have pointed out, the surge is not without obstacles: the assumption of continued growth in Chinese affluence and pricier consumer tastes, as well as a front-on challenge from home-grown Luckin Coffee, which opened 1,500 stores within a year of launching in October 2017 and is targeting 4,500 by the end of this year, focusing on delivering a cheaper cup of coffee, faster.2

Starbuck’s isn’t about to disappear from China—it’s been there 20 years and still dominates the country’s specialty coffee market—but facing direct competition and a Chinese economy that appears much less bulletproof than it did a couple of years ago, some SBUX bulls may consider themselves better served by looking for buying opportunities during downturns than banking on a sustained breakout move above all-time highs.

And short sellers may see more significance in nearby resistance levels, especially if a post-earnings bump runs its course.

Market Mover Update: Yesterday followed the tendency for the SPX to close on FOMC announcement day in the opposite direction of the previous day. As expected, the Fed held rates steady and again signaled patience regarding future rate hikes.3

Boeing’s (BA) earnings announcement revealed the company topped $100 billion in sales for the first time; the stock jumped more than 6% intraday. Traders took more tepid sales numbers from Apple (AAPL) in stride, pushing up the stock by about the same amount they did Boeing.

Today’s numbers (all times ET): Personal Income and Outlays (8:30 a.m.), Employment Cost Index (8:30 a.m.), EIA Natural Gas Report (10:30 a.m.).

Today’s earnings include: Altria (MO), Baker Hughes (BHGE), Baxter (BAX), Celgene (CELG), ConocoPhillips (COP), DowDuPont (DWDP), General Electric (GE), Hershey Foods (HSY), MasterCard (MA), Northrop Grumman (NOC), Raytheon (RTN), UPS (UPS), USG (USG), Amazon (AMZN), Cypress Semi (CY), Edwards Lifesciences (EW), Mattel (MAT), Symantec (SYMC).

 

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1 Forbes. Starbucks Doubling Down On Delivery In The Face Of Competition In China. 12/11/18.

2 Reuters. Coffee startup Luckin plans to overtake Starbucks in China this year. 1/3/19.

3 CNN.com. Fed holds rates steady amid economic uncertainty. 1/30/19.