Shares of Starbucks (NYSE:SBUX) continue to rise seemingly unabated. SBUX stock is now up over 20% year to date and just closed at a new all-time high of $78.06. The upside momentum, however, is beginning to slow. Look for a pullback in Starbucks stock given that valuations are at extremes and technicals are stretched.
Starbucks reported earnings on April 25 that beat on EPS but actually missed on revenues. SBUX stock now is approaching the highest P/E multiple over the past three years with a reading over 30. The last time Starbucks stock was this expensive was June 2017 — which just happened to mark a major top in SBUX shares, as shown by the graphs to the right.
The company also guided slightly higher to FY 2019 earnings of $2.75 to $2.79 per share. That puts the forward P/E at a very rich 28 times earnings, which is especially rich given that revenue growth is slowing considerably. Important to note that growth in China was actually negative last quarter.
SBUX stock is looking decidedly overbought from a technical perspective. 14 day RSI is back above 70 after reaching an extreme just before earnings. Prior instances when RSI was this high marked significant short term tops in Starbucks stock. MACD is flat-lining which indicates momentum is waning. Implied volatility finally turned higher after reaching trough valuations
Although SBUX closed at an all-time high yesterday (albeit by a penny), it failed to make a fresh new intra-day high. This type of price action many times is a sign that the buyers may finally be getting tired, especially after such a monster move higher,
Stock traders should use any rally to short SBUX stock on strength.The initial downside target would be the 20 day moving average at $76.50 with a further downside target at the major support area near $72.
Option traders may elect to take advantage of cheap implied volatility and position in a guardedly bearish fashion. A put diagonal trade fits the bill-buying the June $77.50 puts and selling the May $76 puts for a $1.30 net debit. Maximum risk on the trade is $130 per spread. Ideally SBUX closes near $76 at May expiration.
Tim Biggam may hold some of the aforementioned securities in one or more of his newsletters. Anyone interested in finding out more about Tim and his strategies can go to https://marketfy.com/item/options-and-volatility.
