Behind the Headlines: Starbucks Downgraded; Hits New Low

Starbucks spirals into the red after Bear Stearns downgrade

by Beth Gaston Moon (bgmoon@sir-inc.com) 1/2/2008 12:13 PM


Keywords:

SBUX

stocks

options

Appearing in part 2 of today's "Behind the Headlines" is Starbucks (SBUX), which has hit a new 52-week low today following a brokerage downgrade. "Behind the Headlines" is a daily feature available on SchaeffersResearch.com. Every day, we'll focus on the day's action of newsworthy stocks that are generating a lot of attention. By digging into the stock's sentiment and technical backdrop, we hope to shed some light on the securities.

So, 2007 wasn't a very good year for Starbucks (SBUX: View sentiment for SBUXsentiment, chart, options) – the coffee king of Seattle peeled away more than 42% - and 2008 hasn't kicked off any better. This morning, Bear Stearns downgraded its rating on the stock to "peer perform" from "outperform," citing a cooling economy that could stifle discretionary spending. The brokerage also has concerns over increased labor and dairy costs.

In a note to clients, Bear Stearns said that while "The company is actively trying to improve trends with [TV commercials] and new product focus...we think that Starbucks new cyclical sensitivity has more to do with its expanded customer base including less affluent consumers who react to economic pressures."

This downgrade could jump-start a trend toward the bearish end of the spectrum, as analysts have continued to grasp the bullish flag despite the stock's decline. Ahead of today's move from Bear Stearns, there were 5 "strong buy" and 8 "buy" ratings on SBUX, along with just 7 "holds" and 1 "strong sell." The equity is vulnerable to further downgrades, with 13 analysts still stubbornly residing in the bulls' camp. In the past 2 months – not counting today's downgrade – the number of "buy" ratings has dropped to 8 from 11, while the number of "holds" has shifted to 7 from 3.


Table of analysts' ratings on SBUX

The shares have reacted to today's downgrade by losing nearly 4%, breaching the 20 level, and entering new-annual-low territory. The stock is trading below its 80-month moving average (and the 10-month and 20-month trendlines are a distant memory), but it has yet to breach its 160-month trendline. This final bastion of technical support resides at the 17.20 level.


Monthly chart of Starbucks since January 1998 with 10-month, 20-month, 80-month, and 160-month moving averages

Options players continue to grasp to see Starbucks hit rock bottom. Schaeffer's put/call open interest ratio (SOIR) for SBUX currently stands at an annual low of 0.32. In other words, there are 100 open call positions in the January and February series (combined) for every 32 open puts. Call open interest is at its heaviest overhead, most notably at the January 25 and 30 strikes. This backdrop provides a layer of options-related resistance, but a move up as far as the 25 strike would represent a jump of nearly 30% in the shares. The near-the-money 20 strike is home to just 9,000 open January calls.

All of the excitement on Starbucks today has spurred some action in the January 2009 LEAPS calls. More than 3,000 contracts have changed hands on the January 2009 15 and 17.50 puts along with the January 2009 25 call. Prior to today, these options were home to open-interest levels of 4,644; 2,358; and 20,188, respectively.

For additional timely commentary on today's market-moving news from me and my colleagues Andrea, Elizabeth, Jocelynn, Joseph, and Mark, please visit our Schaeffer's Daily Market Blog section throughout the trading day.

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