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Is Starbucks at Risk for a Big Drop?

Optimism reigns as SBUX looks poised for further declines

by 10/22/2012 2:37 PM
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Starbucks Corporation (NASDAQ:SBUX - 45.15) certainly has its fans among the options crowd, as buy-to-open call activity has been notably active of late. During the past 10 trading sessions on the International Securities Exchange (ISE), Chicago Board Options Exchange (CBOE), and NASDAQ OMX PHLX (PHLX), more than two calls have been bought to open for every put. This marks an advance from the 50-day call/put volume ratio of 1.88 and is higher than the average ratio reading for the past year.

Analysts are also optimistic toward SBUX -- 18 of the 26 analysts following the stock name it a "buy," with not a single "sell" recommendation. What's more, the average 12-month price target among the brokerage crowd is $59.21, or 31% beyond current levels.

Perhaps these bulls are just big fans of the Pumpkin Spice Latte, because the stock has done little in recent days to inspire this positive attention. Year-to-date, the stock is lower by almost 2% and has underperformed the broader S&P 500 Index (SPX) by nearly 10 percentage points in the past month. With its modest pullback today, the equity has now violated its ascending 80-week moving average. This trendline has held the shares in check (on a weekly closing basis) since mid-2009.


As contrarians, we are concerned to see continued optimism -- or even bullish speculation -- on a stock that has exhibited poor price action. Should the holdout bulls begin to jump ship, selling pressure could pick up.

SBUX is expected to report earnings next Thursday evening. While the company has surprised to the upside in three of the past four quarters, the coffee king's last turn in the earnings confessional was a bleak one. SBUX failed to match expectations in late July and subsequently swallowed a 9.4% drop the following session.


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