Earnings Trade - Starbucks-SBUX

Earnings season finally kicks into high gear next week, even though Monday is a holiday. A look at the schedule shows 55 S&P 500 (SPX) companies reporting next week, including heavy hitters such as Citigroup (C), IBM (IBM), Morgan Stanley (MS), Goldman Sachs (GS), Google (GOOG), McDonald’s (MCD) and General Electric (GE).

But rather than talk about the headline grabbers, I want to discuss a stock that was as hot as any in the early 2000s, dropped spectacularly under the weight of its own success, and has since staged a remarkable recovery. Despite the excitement, it’s on few radar screens these days. But maybe it should be.

I’m referring to Starbucks (SBUX), the coffee purveyor that even forced the mighty McDonald’s to change the way it looks at java in the morning. It’s also responsible for many knock-offs that are on virtually every street corner in any U.S. city.

After topping out near $40 in late 2006, the shares fell off a cliff, dropping more than 80% to a low around $7 in November 2008. But since then, SBUX is up more than 230%, as the company finally figured out how to compete in a crowded coffee world.

Currently, the shares are riding higher along their 20-day moving average. The 50-day has also lent a hand on some pullbacks.

SBUX reports earnings Wednesday, Jan. 20 after the close. Analysts expect a profit gain of 80% from 2009, but that’s not excessive given where the company was a year ago. The company has beaten the past three estimates and gained an average of 10% the day after each report. That’ll work for an options play.

The stock’s sentiment landscape is encouraging for a bullish play. The put/call ratio is on the rise, suggesting caution among options players. Analysts are mostly favorable (13 of 22 “buys”), but there’s still room for several upgrades.

All in all, we’re seeing enough pessimism to unwind into further buying pressure.

Overcoming the $24 level would be a big step for SBUX. That’s the site of heavy call open interest and the 50-month moving average. It’s also the scene of highs in December and January.

That said, the recent post-earnings moves have us believing that SBUX should be able to power through this resistance next week.

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