Don’t Throw Out Starbucks Stock Based on One Bad Serving of News

Yes, the headline was bad for SBUX, but there are still some easy profits in the stock

SBUX Stock Still Has a Strong Growth Story Ahead

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Source: Adrianna Calvo via Stock Snap

Last night, Starbucks (NASDAQ:SBUX) broke news that investors are hating this morning. The stock is down 4% on the headline. In their communique, SBUX management lowered their guidance on comparable sales. They also announced the tripling of their under-performing stores closing to 150 in 2019.

They tried to cover up the stink of the bad news with a $25 billion buyback and dividend program though 2020, but the hit on comp sales was too shocking. Management also announced that they are seeking outside help to fix their comp sales and throughput lingering issues.

Overall, most of the announcements were suggestive of SBUX targeting fixes for nagging problems so the headline had good news. But in retail, a hit to comparable sales is insurmountable. This was the cause that sent Chipotle Mexican Grill (NYSE:CMG) plummeting into a stock death spiral.

Okay so we have seen the bad news … It turned out terrible for those with upside bets on SBUX stock. But this opens opportunities for premium sellers like me. Today I profit from what others fear.

Last night, Starbucks management admitted that it has failed at turning the comparable sales around. Investors saw through the pretty financial engineering wrapper and punished the stock hard. But therein lies the opportunity. A falling knife causes put premiums to over-inflate. Since SBUX still is a quality company then I can profit from what others fear.

On one hand, I agree with sellers that bad comp sales is a major loss for the Starbux stock upside momentum but that doesn’t affect the proven supports as much. Unlike the case of CMG, SBUX valuation is not as bloated now as CMG was then. It has room to fall but not into an abyss.

Fundamentally, SBUX has a trailing price-to-earnings ratio of 18. This is the same as Apple (NASDAQ:AAPL) for easy absolute comparison. from that perspective, SBUX is cheaper than McDonald’s (NYSE:MCD) and CMG who have P/Es of 21 and 70 respectively. My point is that SBUX could get cheaper but not by much.

Technically, the stock has been trading in a wide horizontal range since 2015. Today’s drop brings it closer to the lower limit of that range. The risk is that the floorboard gives way to a further dip to $49 per share. This is not a forecast but a scenario of which I need to be aware.

Since today’s Starbucks news puts comp sales performance in danger for 2018, I do not want to bet on upside potential. Instead, I use SBUX options to sell downside risk against proven support. This opportunity generates income from what others fear but if price falls below my level then I own shares at a deeper discount than today’s dip.

SBUX comparable sales are a challenge but management admitted it and now is working to fix it. This is a competent team and they will succeed in the long run. Profit from the dip today.

SBUX Stock Trade Idea

The Trade: Sell the SBUX Jun 2019 $40 put for 80 cents. 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 $39.20.

Selling naked puts is daunting. Those who want to mitigate that risk can sell spreads instead.

The Alternate Trade: Sell the SBUX Jun 2019 $45/$40 bull put spread where I have the same odds of winning. Then the spread would yield 17% on risk.

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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.


Article printed from InvestorPlace Media, https://investorplace.com/2018/06/dont-throw-out-starbucks-stock-based-on-one-bad-serving-of-news/.

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