We all know what happened to the retail sector thanks to Amazon.com, Inc. (NASDAQ:AMZN). Retail stocks have been decimated by the hurt this beast has been able to put on their margins. Most recently, they bought Whole Foods Market, Inc. (NASDAQ:WFM) and in essence placed a foot on the street in the neighborhood.
Some retail stocks have fared better than others and Starbucks Corporation (NASDAQ:SBUX) stock is one of them. While it isn’t the strongest, it being flattish on the year is much better than being down 20% or 40% like Target Corporation (NYSE:TGT) or Macy’s Inc (NYSE:M).
SBUX management is a proven winner and it rarely gives Wall Street specific reason to sell its stock. It has had issues with throughput of late. Experts are concerned over the long checkout lines as a problem for business. To me this is an asset. It is a high class problem to have too many clients at the checkout register of all of your stores. This points to a successful global brand, which is likely to serve as the base for solid future growth.
Investors reacted negatively in July on comments from the CFO on their earnings call. Starbucks stock has meandered since but it has had five plus or minus moves of over 5%. So things were active inside of a flat overall period.
Technically, the $52 per share zone has held as a floor for almost two years. SBUX did dip just below it around the 2016 U.S. elections, but besides that support held strong. While this is good news for those were long the stock, it now presents a risk. Should the floor break, bears will prevail and overshoot lower. The next area of contention in Starbucks stock could translate into about a 7% lower correction to $50 per share.
Long-term, I expect that SBUX stock will perform well as long as equity markets remain bullish. I don’t anticipate a breakdown in price without a market-wide correction. And if one should occur, Starbucks stock has less froth to lose then stocks that are near their all time highs. It has already shed more than 15% from the high it set for months ago.
Fundamentally, the value of SBUX stock is comparable to its competitors. Furthermore it pays a decent dividend which helps defend the stock in downturns. Analysts on Wall Street still expect quite a bit of improvement in the stock price.
Most of the ratings are for buying the stock as it is trading 7% below their average price target. However, it is trading at the upper end of the range, meaning there’s more room below the average price set by analysts than above.
Bottom Line on SBUX Stock
At this point, I am willing to bet that Wall Street will continue to be bullish equities, so there will be no significant corrections into early 2018. Therefore, I want to to use the value that is in SBUX stock to generate income with no money out of pocket. The trick is to find solid support levels against which to sell premium.
The trade: Sell the SBUX Apr 2018 $45 put for 70 cents per contract. This is a bullish trade that has an 85% chance that price will stay above my strike, so I can retain maximum gains. Otherwise, I will accrue losses below $44.30.
Those who want to mitigate the risk that comes from selling naked puts can sell a spread instead.
The more moderate trade: Sell the SBUX Apr 2018 $45/$40 credit put spread, where I can deliver 8% in yield for about the same odds of winning.
Either way, I don’t need a rally in SBUX to profit. In fact, the stock can fall another 15% from here and I can still win. Nevertheless, investing is risky, so I never bet more than I can afford to lose.
Learn how to generate income from options here. Nicolas Chahine is the managing director of SellSpreads.com. As of this writing, he did not hold a position in any of the aforementioned securities. You can follow him as @racernic on twitter and stocktwits.
