Ever since Amazon (NASDAQ:AMZN) changed the way the world shops, the retail sector has been on its heels. Most brick and mortar companies are still reeling from the AMZN effect and are still scrambling to find a solution to that riddle.
Also as a result, there is confusion and misconception on Wall Street that the retail stocks are dead. This is false since there are a few winners and Starbucks (NASDAQ:SBUX) is definitely one of them.
In the last 12 months, SBUX and Nike (NYSE:NKE) are both up over 32%, which is three times that of the S&P 500. These are proven companies for decades and unlike typical brick-and-mortar retail, they control their inventories and margins.
SBUX stock went through a rough patch because of operational worries, but even those were the great kind of problems to have. Critics were on it for having long lines, but, to me, having too many clients in your store every day is a great opportunity. The people there want a daily experience more so than they want the actual coffee. The more people who line up, the more diverse the experience.
This is nothing you can put on a profit and loss (P&L) statement, but the proof was in the fact that this is no longer a concern for traders and clearly they voted with their actions on the stock. So from the opening salvo, you’d think that I would be recommending to buy SBUX stock right here and now, but I am not. It is up so much that now it has too much love on Wall Street. After this big a rally, SBUX stock needs everything to go right.
Before you send me hatemail this is not the same as saying that “short SBUX.” This what I call too high to chase and too hot to short. So if I am not long it already I should wait for a better entry point even if it means that I miss out on more upside.
I know that sometimes the idea is to buy high and sell higher but usually, I chase a technical trigger for that. In this case, Starbucks stock is at all-time highs heading into the April earnings. This makes it tough to spike even higher. Management would have to crush earnings and raise guidance even higher but in this uncertain geopolitical risk, I am not confident they can.
The U.S. is in the throes of a tariff war with the world. SBUX stock is sensitive to that, especially in China. The consensus is that we are close to a deal with them but nothing is certain until the ink is dry. This is a fluid situation since we are dealing with volatile egos on both sides.
SBUX is not cheap selling at a 32 price to earnings ratio relative to traditional retail. McDonald’s (NYSE:MCD) and Target (NYSE:TGT) sell at a 24 and 14 P/E’s respectively. But the premium is justified for as long as SBUX stock continues its rally. In essence, investors get what they pay for and in this case it’s half.
Technically, even though I don’t see an obvious trigger to chase up, SBUX stock has three support zones.
Mid-January, it broke out from the $65 level into a 15% rally. Along the way, it sliced through another pivot level at $69 per share and that becomes the first level of support. If we get a dip then I look for support there first, then at $65 if it fails. The breakout from November would be the third support zone if the first two fail.
So clearly SBUX stock is in favor among investors but for the short term, I see no rush to buy it.
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.
