The market is leaving great technical clues that I have been taking advantage of, while the rest is just noise. The suit-and-ties that are underperforming the market and missed October’s dip are once again spitting nails because they missed the latest move up. I analyze the markets for 100 hours every week, and right now my homework tells me there’s more upside ahead, and I like one stock a lot right now: Starbucks Corporation (SBUX).
The company recently reported a “decent” quarter by Wall Street’s standards. It matched earnings of $0.74 a share, but revenue numbers were a little light, coming in at $4.2 billion versus expectations for $4.23 billion.
Starbucks also forecasted current quarter numbers at $0.79-$0.81 a share and 2015 numbers of $3.08-$3.15 a share. The suit-and-ties were looking for $0.83 a share and $3.16 for 2015, respectively. I have a good feeling Starbucks “sandbagged” its forecast, as the current quarter should be the company’s best three months of the calendar year.
Lower gas prices will also be good to Starbucks, as consumers have extra cash to spend. Wall Street was worried about “traffic trends,” but revenue growth for 2015 is pegged at 16%-18%.
Although the outlook for retail and holiday sales could be shaky, you can’t order a hot latte online and have it ready for you in minutes. Stronger traffic from the colder months and Starbucks’ expanded food menu should lead to higher sales. In fact, Starbucks delivery could be coming to your area next year, as the company will be rolling out a food & beverage delivery service in select areas. Starbucks’ breakfast sandwiches are healthy and light following its partnership with a French bakery.
Starbucks will benefit from the holiday shopping season, and its Verismo machines will likely see a nice bump in sales. Coffee pod margins are ridiculously high, but, for me personally, having the home setup with the syrups and mixes cures the office “withdrawals” on the days I don’t stop by a Starbucks. The company’s CEO said commodity costs aren’t an issue, and Starbucks has done a phenomenal job over the years leveraging its coffee prices and margins.
Another area of growth will come from Japan, as the company recently acquired the remaining 60% of Starbucks Japan that it didn’t own. This will add a billion dollars in revenue next year. In addition, to continued overseas growth, Starbucks is planning to open 100 “specialty” stores in supermarkets to further engage coffee enthusiasts.
These special Starbucks locations will enlighten consumers on coffee roasting with a line of its “reserve” coffees. Tasting rooms and other cool features are expected and could be a nice fit to expand its coffee offerings to grocery stores.
I haven’t mentioned the tea side of Starbucks with its acquisition of Teavana. The company has big plans to grow that business, although it may take a number of years for tea to become main-stream here in the United States.
I wanted to outline the reasons I am bullish on Starbucks over the short- and longer-term, and the way I’m playing it right now is by going long the SBUX December 77.50 calls (SBUX141220C00077500). The calls closed Wednesday around $1.40.
My profit target for the calls is $2.10, but I also recommend setting a stop loss at $1.15.
A close above $77 for Starbucks shares could lead to a run to $80. Near-term support is at $75.50 and the 50-day moving average. I like the trade as long as $74 holds.
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