Starbucks remains a well-run company but the stock is now flashing as immediate-term overbought in Keith’s model.
Overbought TRADE and broken TREND (bullish TAIL). Refreshed range = $22.16 - $24.39
Despite the fact that SBUX continues to pursue additional avenues of growth and seems to have continued sales momentum, the timing of Keith’s overbought level being triggered is supported by the fact that the company will be lapping its most difficult top-line comp and year-over-year EBIT margin comparisons of fiscal 2010 in its current fiscal 4Q10. For the past six quarters, the company has posted sequentially better comps on a one-year basis but I believe it is unlikely that the next reported quarter will continue that trend (reported +9% in 3Q10). I would not be surprised, however, to see the company post another quarter of sequentially better trends on a two-year average basis (SBUX needs to report a +4% comp or better in the U.S. to maintain two-year average trends from the third quarter). The company laps its first positive comp in the U.S. in 1Q11.
I think same-store sales and margin growth will continue to materialize in FY11 but the rate of growth will slow and the company’s ability to continue to surprise to the upside from both top-line and bottom-line perspectives will likely diminish as expectations have caught up with the company. That being said, I think the stock still makes sense on a long-term basis as the company stands to benefit from continued leverage of its existing store base, international growth, its increased investment in marketing and its pursuit of additional platforms of growth (largely VIA and Seattle’s Best Coffee).
It is worth noting that Keith shorted the S&P 500 today just after 11am. As I wrote in a note to Hedgeye Macro clients on Tuesday, we believe that the August payroll number being released tomorrow will be a disappointment versus current expectations (of -100,000).