Until its latest rally, Starbucks Corporation (NASDAQ:SBUX) was flat for about a year. However, a 7% push since April 13 has given SBUX stock a breath of fresh air, and put it on the path to overtaking its 2015 highs.
Starbucks is currently one of the few fast-casual diners (which it’s typically grouped into) that are doing well in the U.S. Same-store sales are sub-5%, but at least they’re growing.
And the progress that the company is making in China is unbelievable. China eventually will be a larger market than the U.S. for the coffee titan, so the progress it makes there over the next decade is critical.
A rising dividend is another argument for the bulls.
The question heading into Thursday afternoon’s fiscal second-quarter earnings report, though, is what path will SBUX stock take from here? Will it rocket to all-time highs, head back from whence it came, or something in between?
Expectations for Starbucks
SBUX stock hit a new 52-week high on Wednesday, bringing expectations higher as well. Often, when a stock rallies like this into earnings, it turns into a “sell the news” event.
I think Starbucks earnings could be setting up for a similar reaction. Perhaps it’s not an outright sell. But the reaction to earnings could result in a small pullback for SBUX stock or a muted reaction after-hours.
There’s one thing that makes gauging Starbucks a little trickier, though: U.S. same-store sales.
For the past two quarters, Starbucks has turned in a subpar report card, with 4% U.S. comps. For almost any other company, those are great numbers. But for SBUX, it broke a long string of quarterly comps north of 5%.
Then-CEO Howard Schultz — who stepped down and is now executive chairman — was unhappy with the results. Traffic had turned stores into a frenzy near peak hours, according to management, and Starbucks is trying to implement solutions to get people through more efficiently.
Thus, American comps could be underwhelming again this quarter. But (and this is a big but) if management tells us they’ve found a solution and second-half same-store sales will accelerate, investors likely will use that as their buy/sell trigger over other results.
How to Trade SBUX Stock
This latest breakout is quite refreshing. For long-term investors who are truly thinking long-term, stay the course. There’s no reason to veer away from a terrific company.
For short-term investors, though, Starbucks is trickier to navigate.
We believe the stock has gone too far, too fast. As a result, a muted reaction higher or pullback is the most likely outcome.
SBUX stock is overbought in the short-term, as seen by its Relative Strength Index reading on the chart (top purple circle). This doesn’t mean a correction is due, but it does increase the odds that Starbucks is exhausting itself.
Clearing through the $58 to $59.50 region of resistance was a big move. Barring a terrible quarter, this region should act as support. Given that the stock’s 10-day moving average is at $59.50, I would expect it to act as support too.
A pullback of 2% to 4% would be really healthy on the back of a strong quarter. It will allow the stock to digest some of its gains and rebuild momentum for a push higher.
Those who are already long can stay for the ride, or consider selling some upside calls. This gives Starbucks stock a bit more room to rally, but adds some income in the event of a pullback.
Bret Kenwell is the manager and author of Future Blue Chips. He can be contacted on Twitter via @BretKenwell. As of this writing, Bret Kenwell held a long position in SBUX.
