Starbucks is a poster child of the amazing returns that have been possible for those investors who have held throughout the bull market of the past 6 years. SBUX has gone up more than tenfold since the March 2009 low, and is now worth $78 billion, an incredible valuation for a retailer that sells mostly coffee.
Analysts expect SBUX to earn around $2 per share for calendar year 2016. Even if that comes to pass, the stock still trades for around 26x 2016 EPS, and that’s after a 10% decline from the highs. At that valuation, an awful lot has to go right for a 15%+ return in the stock, while not much has to go wrong to see a significant 20%+ decline.
Of course, the reason why SBUX still sports such an expensive valuation is that the company has continually delivered in the past 5 years. Essentially, everything has gone right. However, as we have seen with any global retail chain (particularly one with physical locations), growth is dependent on size. McDonald’s, the largest chain in the world, has not been able to convincingly breach the $100 billion market cap barrier over the past 3 years, as its growth has stagnated. For Starbucks, historical growth metrics become less relevant when the company has already captured much of the low hanging fruit in terms of good geographies for new stores and expanding brand awareness over time. At this point, further growth will be more difficult, both because the size of new sales and earnings needed to grow a $78 billion valuation is much greater than to grow a $20 billion valuation, and because the company now has to choose to grow in less desirable locations since it’s already in many of the hot spots.
Dan summarized his view in the pre-earnings post from late July:
My View: SBUX is a good old fashioned cult stock, like CMG, DIS, NKE and TSLA. There is no level of bullishness that is too much as long as they keep putting up mid teens percent earnings and sales growth. Trying to short this stock, and the others listed above have been a fools errand for the most part. Its important to remember though that 30% of SBUX’s sales come from outside the U.S. and guidance of adverse impact from the strength of the dollar and the health of emerging markets like China will likely dictate the stock’s reaction.
Two things have changed in the past month. First, international growth concerns have become more significant. Second, and probably more importantly, the momentum trade for many market leaders has ended, and the technical damage to market leaders like SBUX likely implies at least limited upside in the near term, if not further weakness going forward.
In fact, Friday’s aggressive decline in SBUX on the break of the 50 day average was likely exacerbated by trend followers selling on the break of the trend. And yesterday’s panic selling on the open did even more damage. The stock is now convincingly below its 50 day ma for the first time in 2015:
At this juncture, since the trend is broken and the stock is still exceptionally expensive, the trade might be to wait for a move back up to the 50 day ma around $55, at which point a trade targeting the $48 support level would set up as decent risk/reward. One possible trade on a bounce would be the Jan16 55 / 45 put spread, which would probably cost around $2.50 if SBUX rallied back to $55. That would give you enough time for a selloff back to the $48 support level in the coming months.
For now, the stock is in no-man’s land, still several dollars above the rising 200 day moving average and several dollars below the uptrend signified by the 50 day moving average. In any case, the no-brainer caffeine fix might finally be over.