Starbucks Corporation (NASDAQ:SBUX) Chairman Howard Schultz leaving could turn out to be a good thing in disguise. Of late, the messages from the outgoing Chairman have been muddled with social issues. Maybe now the new management can focus more on the bottom line over public opinion.
This is a proven company with a tremendous following. Its clientele are not likely to stop frequenting its stores any time soon. So they have a great base on which they can build and execute on future plans. They can even afford to make a few small operational mistakes but hopefully no public faux pas like the recent incidents.
Recently SBUX had a major racial issue headline over the mishandling of two guests. The company reacted quickly and took steps to put us at ease that the incident was clearly a mistake and that they will work hard to make sure it would never happen again.
Fundamentally, SBUX valuation is reasonable. It sells at a trailing 19 price-to-earnings ratio so it’s not bloated. This is company that has a problem of long lines at the checkout counter. I am confident that management will solve that challenge and continue on its growth trajectory. And therein lies the opportunity.
Technically and for the last three years, Starbux stock has traded inside a wide channel above $52 per share. So the buy and hold strategy is not working. But I expect that zone to hold through 2018.
Don’t mistake my bullish trade today with over-zealousness. I am not an SBUX stock perma-bull. I am merely betting against bad scenarios that are not likely to happen.
A headline like a founder and leader of a company leaving increases volatility in the stock and that works well for my strategy today. SBUX put option premium are inflated on the headline. The stock was already wound tight technically so the reaction to the headline is normal. This tells me that it won’t be an issue to most investors.
Wall Street experts are mostly optimistic about the stock with their rating yet it’s still lagging fall below their average price targets.
The Trade: Sell SBUX JAN $50 put for $1.45. This is a bullish trade which does not require a rally to profit. Here I have an 85% theoretical chance of success. But I would accrue losses below $48.55.
Selling naked puts is daunting. Those who want to mitigate that risk can sell spreads instead.
The Alternate Trade: Sell SBUX JAN $50/$45 credit put spread. The spread has the same odds but would deliver 12% yield on risk. Neither trade require a rally to profit. In fact the stock can fall an additional 12% and I could still retain maximum gains.
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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.
