When I last wrote about Starbucks (NASDAQ:SBUX) stock, it was rallying into last year’s highs. I was cautious on the name, although I now know I missed out on a bit of upside. But I’m not worried. Today’s opportunity in SBUX stock is even better.
First, let’s take another look at the big picture. Many macroeconomic assumptions have changed in the last few weeks. Global closures to combat the coronavirus from China will derail growth estimates.
There will also be negative economic news. I doubt that the world is prepared to see negative GDP growth out of China or in the U.S.
Starbucks is ultimately a great American company whose stock is tremendously suffering. The human losses from the virus are tragic, and governments are panicking around the world. Obviously, the knee-jerk reaction was to embrace lockdowns.
These lockdowns will directly impact profit and loss statements. There will be big corporate pain. Now, central banks are scrambling to bring out the financial bazookas. The Federal Reserve cut rates to zero and is rolling out massive quantitative easing.
And Wall Street knows that even this action isn’t enough, driving the indices down on Monday. It’s safe to say this is a self-induced financial crisis of epic proportions. Perhaps it could have been avoided with a little better planning, but hindsight is 20/20.
Starbucks Can Navigate the Turbulence
Luckily Starbucks has a proven team to navigate these difficult times. They have been through several tests — including a very recent one in China. They will emerge from this crisis stronger and on better footing. It’s a question of time and levels.
SBUX stock has already shed over 40% of its value since the July highs. Moreover, it has fallen into a well-consolidated level that lasted for two years. Usually chart zones that were this hotly contested provide strong support on the way down.
But it crashed 16% Monday to close at $58 per share. Catching falling knives is scary, but it’s especially scary on days when the CBOE Volatility Index (VIX) is near 80. With volatility this high, there are no definite lines to call support here. But there are logical price areas, and this is one of them.
It’s also important to note that SBUX isn’t cheap yet. It trades at a price-earnings ratio of 25 and a price-sales ratio of 3.4. There is still some fat left on its bones. If the broader market can find its footing, Starbucks will rally along with it.
What Is Ailing SBUX Stock Now?
The easy answer to that question is that sentiment has eroded to levels even worse than those of 2018’s market correction. Monday even topped the financial crisis of 2008.
This is what happens when doctors rule the world. Experts have recommended that we shut everything down and avoid human contact. What’s the result? A collapse in business activity around the world. Economic reports for February and March will be disastrous.
And until Monday, many thought this was an ordinary selloff. What ticker tapes were they watching? The small-capitalization Russell 2000 index has already corrected 40% and yet no one is talking about a bottom.
What does this mean? Stocks were either fraudulently overvalued or we are overreacting here. I am in the latter camp. Only time will tell which is correct.
Common Sense Wins in the Long Run
Nibbling now on great stocks like Starbucks is smart. The point is not to find a perfect bottom, but a sensible level. If SBUX’s consolidation zone here fails, there is luckily one below it near $40.
If Starbucks falls to those levels, it will pivot into another “buy” zone. I recommend initiating long positions at these levels, then adding if it falls 20% lower.
It’s important to remember that we get record days when fear is this high. We will still have a V bottom, but V will stand for “vaccine” and not the shape of the recovery. Confidence will serve as medicine, curing Wall Street’s deep economic wounds.
Positive vaccine updates — like a solid schedule — will help reverse negative sentiment and start the healing process. Until then, be cautious and do your own research.
Nicolas Chahine is the managing director of SellSpreads.com. Join his live chat room for free here. As of this writing, he did not hold a position in any of the aforementioned securities.
