Friday, February 25, 2005

Fun with SBUX

Check out this Starbucks pump on MSN money. I like reading John Markman's strategy lab commentary, but this SBUX pump is shameful. I have been pretty mum on here about what stock's I've been shorting since January, but I want to talk about SBUX right now because of that article. I began shorting SBUX just above the $58 level in mid January, and added to that position just above the $54 level.

As close as I can find to a thesis in Markman's article is this line from the second paragraph: "Perhaps the beans have addled my brain, because I think that the company's campaign to turn coffee into community -- while fully at odds with common sense much of the time -- will continue to work." This must be his main argument because the article is concluded with the following line: "Starbucks shares are down nearly 22% since Dec. 29 on growth concerns, but look for them to recover over the next couple of months and lead the pack again by year-end." The bold emphasis is mine.

Markman centers his argument around describing how compelling the culture and atmosphere that Starbucks creates is for its addicted customers, and leaves the real hope for SBUX going forward as a tiny sidenote to open his second paragraph: "Now it looks like Starbucks is getting ready to take its unique brand of caffeine capitalism farther into the world, as the company announced at its annual meeting last week a plan to open 1,500 new stores globally and boost total revenue by 20%." I was hoping this would be his thesis because I am interested in hearing commentary and analysis on Starbucks' foreign market expansion plans and what it will do for the company, but that is all the attention this topic got in the article. Sadly, the article feels like it could have been written at any time over the last 5 years and tucked away for a rainy day. I don't like arguments for buying stocks like the ones presented by Markman because they ignore the fact that timing is everything in business.

What Markman didn't mention is that coffee prices just broke out from a well formed cup & handle base in early February and have been tearing off into new high ground ever since. Any sustained coffee price advance will cut into Starbucks' profit margins, supressing future earnings. Additionally, the falling dollar hurts American importers as much as it helps American exporters, and guess what? Most coffee is imported. These higher coffee prices have not yet reached SBUX's bottom line because big companies hedge their product inputs using contracts in the commodities market. But SBUX see's it coming. Late in 2004 they raised the prices of many coffee items in the stores. However, I do not think that they will be able to pass this entire expense on to their customers because their customers are already reeling from holiday expenses. When I need to conserve money, the very first thing to go is luxury consumption like SBUX. I suspect I'm not the only one because SBUX reported same store sales growth for January has slowed to 7%, down from double digit numbers in the past.

Starbucks chairman Schultz warned on December 2nd that recent growth may not be sustainable, and then began dumping SBUX stock faster than he has in years. Glancing at the chart and the insider sales side by side, it is pretty clear that the chairman is trying to get rid of as much stock over $50 a share as he can, beginning about a week after the stock broke above $50 in October. No wonder SBUX had such a great November. Its no suprise either that Schultz is upset about the recent share price drop.

But a technical analyst doesn't even need to bother with all these details. The stock price and volume over the last few months told me everything I needed to know. Guess what a weak volume rally following a big volume selloff makes? A head and shoulders top. But the Motely Fool still likes SBUX. In fact, they even recommend buying more if it drops below $45: "In short there is much to look forward to, and if prices were to dip under $45, I'd consider adding to my position." If it crashes under $45 a share and drifts back up to there on thin volume, I may sell them some shares (short of course). I imagine John Markman might too.


At 6:43 PM, Anonymous Liz L. said...

Just because Starbucks continues to take up so much real estate in my head -- meaning that even if weeks go by in between visits, on a certain level, I am always wanting a double tall latte, I have been considering buying SBUX for ages. The charts didn't look right to me, but that weird (now I realize, thanks to Fickle Trader) Markman column might have pushed me over the edge, if you hadn't brought me to my senses. I don't think I'll short it, but you have saved me from going long. Well done.

At 10:02 AM, Blogger jontait said...

Here is a link I forgot to put in the article regarding the density of Starbucks stores.

I'm sure none of the stores in the talked about areas are cannibalizing each others' business...

At 10:02 PM, Blogger Dante Covelli said...

Hi Jon - I don't know if you ever flip on Fox News on Sat. morning... I noticed one of the talking heads predicted a huge run up for SBUX, with a "target price" of $65... I think it was on "Forbes on Fox", and the other 2 guys basically laughed at him... but I thought of you when I saw it... :)
Take care - Dante

At 8:13 AM, Blogger jontait said...

The guy was probably trying to round up buyers lol


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