Back in late July I took a perfectly well conceived idea in SBUX on the short side and F’d it up hours before their Q3 earnings. I settled for a small gain prior to the report and the stock’s subsequent 11% drop the next day, which totaled 18% by the following week.
I don’t have any new reasons to lean short (read previous reasons below from my original post on June 29th) other than I think this is a great spot to press broken stocks like SBUX that were prior market leaders with weakening near term fundamentals.
SBUX has displayed some very recent relative strength as the market has trended lower the last 2 trading days, but it also didn’t attempt to move higher as the SPX made new highs early in the week. The 12% re-tracement since early August is back to the gap level and appears to be serving as resistance.
Consumer discretionary names, especially higher end names like TIF, COH and NKE look increasingly vulnerable as we get ever more signs of a hard landing in China and a looming recession in Europe. But on the lower end of the spectrum, CMG and MCD’s inability to rally after recent earnings misses leads me to believe that we will see another leg lower in these names, which is also why U.S. multinationals with large exposure to Europe and Asia like SBUX and YUM look like great shorts to us.
TRADE: SBUX ($48.04) Bought Sept 47 Put for .90
-Profits 46.10 or lower,
-Losses up to .90 btwn 46.10 and 47, max loss of .90 47 or higher.
This is really a market call, if equity markets the world over are disappointed by the Fed next week and by ECB in the coming weeks, I expect a 5% sell off in Sept. Names like SBUX that have already disappointed and broken down, but are well off of their lows, seem like decent presses on the short side.
-With the last week of August, and the Labor Day Holiday coming I will look to leg into a put spread if and when the stock breaks my way to avoid too much decay.
-Also paying about a 25 vol for near the money puts seems reasonable when you consider the 60 and 90 day realized vol is 38 and 36 respectively.[/private]
Trade Update July 26th, 2012 at 2:25pm: Trade Update SBUX: Closing Aug Put Spread for a Small Gain in Front of Earnings
SBUX reports their fiscal Q3 earnings tonight after the bell, the options market is implying about a 6% move which is well shy of the 3.33% average move over the last 4 qtrs.
A little less than a month ago I bought an Aug 50/45 Put Spread in SBUX for .85 when the stock was 53.10, now just a couple hours in front of their earnings and the stock about $52, I am going to take the small profit I have in the trade and wait to listen to what the company has to say. I very much expected the stock by now to be in striking distance of my long strike and thus give me great odds of succes heading into earnings that given the price action by CMG, PNRA and WFM in just the last week, this could set up as somewhat of a binary event.
While long premium options structures are likely the best way to define your risk heading into potentially volatile events, I do not have the conviction that SBUX will disappoint to the magnitude that it would take to have this trade be profitable in the next 24 hours.
Action: SBUX ($51.94) Sold to close Aug 50/45 Put Spread for .97, .12 profit.
Nothing to write home about, but with an eye towards managing single position risk, in what has become an increasingly volatile earnings season, I am going to take a step back on this one and take another look. If anything with lower premium outlay, and better risk reward pops up prior to the close I will be sure to update.
Original Post June 29th, 2012: Warning, Sirens Beckoning in Starbucks
Here is a quick preview of what I will be discussing on Options Action tonight on CNBC at 5pm eastern:
On the heels (pun intended) of my recent success short in NKE, I want to look for similar situations in the consumer discretionary space, where other growth companies could face similar near term headwinds overseas.
SBUX was one of the first companies to come to mind, when you consider that about 30% of their revenues come from outside North America, and the company’s high 20s PE multiple is largely predicated on growth opportunities overseas.
The chart below shows the high correlation btwn NKE and SBUX over the last year, with both making new all time highs within a month of each other in April/May, only to fall at least 10% from the highs, dramatically under-performing the broader market.
MY VIEW: I want to hit on a handful of points that lead me to extrapolate NKE’s problems overseas and their earnings miss to what what we could see out of SBUX when they report their fiscal Q3 earnings on July 26th.
- When the company reported fiscal Q2 earnings back in late April the company notched their first disappointing comp in years in EMEA (Europe, Middle East & Africa), which is largely Europe. I would be very surprised if this was a one qtr phenomenon given the string of disappointing economic data out of the region of late.
- Has held up reasonably well compared to other high valuation consumer discretionary names like LULU, TIF and RL, with the stock trading at about the mid point of the year to date trading range, still up ~15%. From a pure technical perspective, the fever has broken, and the stock’s under-performance on a risk on day like today with the SPX up over 2% and the stock lagging, it tells me there is fear in investors eyes.
- SBUX gets over 30% of their revenues from overseas and will rely a good bit on growth, particularly coming from Europe to offset decelerating margins in the core market in the U.S. Any signs of a sustained slowdown overseas, investors will be forced to second guess the street’s aggressive eps estimates for 2013 calling for 25% growth.
- Crude oil up 9% today should also worry investors as higher gas prices at the pump could cause some consumers to reconsider $5 lattes on a regular basis.
The stock in my opinion is priced for perfection and I want to play for a re-test of the $45 level, which was significant resistance last year and would also place the stock unchanged on the year.
TRADE: SBUX ($53.10) Bought the Aug 50 / 45 Put Spread for .85
- Bought 1 Aug 50 Put for 1.30
- Sold 1 Aug 45 Put at .45
Break-Even on Aug Expiration:
Profits btwn 49.15 and 45, make up to 4.15, max gain of 4.15 at 45 or below.
Losses of up to .85 btwn 49.15 and 50, max loss of .85 at 50 or above.