Following a lukewarm earnings report from Starbucks Corporation (NASDAQ:SBUX) and tepid reaction by investors, a bearish long put strategy from the SBUX options menu is ready to go.
Starbucks had been a hot investment for investors. Since the nadir of the financial crisis back in March 2009, Starbucks stock rocketed higher by about 1500% at its peak of $64 set back in October of last year.
But that was then and this is now. Now, a once-hot SBUX stock is cooling off big-time — and rightfully so as the growth story for Starbucks and investor expectations face a downsizing.
Don’t get me wrong, the company is still growing, but future expectations may prove too high. Analysts are forecasting SBUX to enjoy sales growth of nearly 19% for the coming five year period.
On the heels of growth just over 20% in the prior five years, the Street’s current estimate for Starbucks stock is no small feat. And in our view, the forecast could be a misplaced anchoring bias on the part of investors wanting more of a good thing.
In fact, weak-trending same store sales comps could be a bearish canary that expectations are too high for SBUX. In conjunction with a saturated U.S. market and still growing, but challenging, international environment, there’s evidence to believe Starbucks stock’s above-market multiple is at risk of compression.
It’s also no secret growth investors typically enjoy piping-hot quarterly profit reports. And while year-over-year earnings gains are still evident, SBUX isn’t exactly wowing the Street with a penny beat, penny miss and consecutive profit matches since hitting its all-time high last fall.
Net, net Starbucks stock is akin to being served day-old coffee when you’re craving and used to getting a skinny, mocha latte Americano on a daily basis for a very long time.
SBUX Stock Weekly Chart
A visual inspection of the monthly chart shows what was addressed earlier — namely, a piping hot price run since 2009. But, along with a weakened growth story the technical picture for Starbucks stock is in position to challenge bulls with lower share prices.
Notwithstanding last summer’s slippery flash crash episode, it has been nearly four years since SBUX has put together a correction of any real notice. By “real notice” I mean a decline in the neighborhood of 30%.
Many growth traders who are long a name like Starbucks assume corrections of up to 30% as par for the course. The reason for this is, most stocks like this, once their growth stories begin to falter, will tumble on the price chart. Worse yet, most of those stocks will take year to challenge their former highs — if they ever do again.
We’re not saying SBUX won’t see higher prices. In fact, we believe it’s the caliber of stock which eventually will see new all-time highs. But given the magnitude of Starbucks stock’s price run, it would be very unique for shares to not experience a larger correction prior to new highs being claimed.
SBUX Long Put Strategy
Reviewing the SBUX options board, the Oct $55 put is attractive. Overall cheap premiums are reflected in the current price of $1.56 versus Starbucks stock’s Tuesday closing price of $55.30.
The limited-risk, at-the-money contract amounts to less than 3% stock risk while having the right to participate bearishly in two of the market’s most bearishly volatile trading months.
Bottom line, that’s a nice blend of risk-to-reward for a bear in SBUX, but I’d go a step further and exit the position if the put eventually loses half of its value. Similarly, adjusting into a low-risk or even no-cost vertical or bearish butterfly if SBUX begins to correct to the downside also makes good sense — and cents — at the same time.
Investment accounts under Christopher Tyler’s management do not currently own positions in any of the securities or their derivatives mentioned in this article. The information offered is based upon Christopher Tyler’s observations and strictly intended for educational purposes only; the use of which is the responsibility of the individual. For additional market insights and related musings, follow Chris on Twitter @Options_CAT.
