On Friday as I was perusing some stock charts and it struck me how many similarities there are between Nike (NKE) and Starbucks (SBUX). And not just the look and performance:
— Dan Nathan (@RiskReversal) May 20, 2016
On CNBC’s Halftime Report today a research analyst from Baird made the case that SBUX was cheap relative to expected growth. I didn’t hear the whole discussion, but it’s not all that original as there are currently 24 Buy ratings, 6 hold and no Sells on the stock.
Prior to the Halftime Report segment, when SBUX was trading $54.50, there was a bullish risk reversal bought, where a trader sold to open 5,000 August 45 puts at 30 cents and used the proceeds to buy 5,000 of the August 60 calls for 48 cents, resulting in a net debit of 18 cents for the trade. What’s interesting about this trade is that if in fact it is a bullish trade structure, the long delta is only 25. The delta is on the Aug 45 puts at just 8. As a rule of thumb most traders are hesitant to sell options naked that have less than a 10 deltas. (you’ll hear the expression comparing it to picking up pennies off of the train tracks) This trade breaks-even at $60.18 (the strike plus the premium) on the upside, with unlimited gains above. The trader would lose the 18 cents (or $90,000) in premium if the stock is below $60 and would be put 500,000 shares of the stock on August expiration at $45 and suffer losses below.
If this trader was looking to offset some decay of the Aug 60 calls I can see why they might have sold the way out of the money put as there are only 5 options strikes and there are no out of the money calls that make sense to sell. Why are there no good upside calls to sell? Well, the stock acts horribly, down about 9% on the year, and about 15% from its all time highs made last Fall:
For investors who buy into the whole P/E to Growth for a premium brand and product like SBUX, they will need to see an uptick in same store sales comps in growth areas outside the U.S. pick up a bit after two straight quarterly misses in China. In an investment environment that has gotten a bit more cautious on such mundane things as valuation, continued international comp misses will make SBUX’s P/E of 29x fiscal 2016 expected earnings growth of 21% on 11% expected sales growth look downright frothy.