Starbucks Is a Star Again

06/17/2010 11:37 am EST


Joseph Hargett

Financial Analyst, Schaeffer's Investment Research, Inc.

Joseph Hargett of Schaeffer’s Investment Research says the coffee chain’s stock has been hot, prompting new bearishness among investors, but that could be a contrary indicator.

According to The Wall Street Journal’s “Heard on the Street” column], Starbucks (Nasdaq: SBUX) may be poised to outperform expectations. [A recent] article ("The Stars Could Be Aligned for Growth at Starbucks," June 14th) recounts the coffee king's impressive 27% [annual store] growth between 1995 and 2005, one that outstripped McDonald's (NYSE: MCD) rate from 1965 to 1975. But the Journal also highlights how SBUX had to "retrench" as the recession deepened.

However, the same factors that drove the company's earlier growth remain intact, as sales growth has begun to accelerate. As the [writer, John Jannarone,] states: "There is good reason to believe the Starbucks growth story will return," as the company "...faces little competition from other specialty-coffee chains in the US."

Furthermore, the Journal speculates that as SBUX's overseas operations mature, it should see an increase in international operating profit, citing similar results from McDonald's after its stores gained maturity in overseas markets.

While this piece is mostly bullish toward SBUX, it does cite the stock's valuation, currently [near 20x] the consensus earnings estimate through September 2011, as a potential concern. Given the heavy-handed optimism doled out by the Journal, this criticism almost seems an afterthought. That said, this "afterthought" is beginning to creep into what is largely a bullish backdrop for investor sentiment.

For instance, the stock's Schaeffer's put/call open interest ratio (SOIR) of 0.82 [recently rested] in the 22nd percentile of its annual range, indicating a wealth of call open interest, or investor optimism.

However, the International Securities Exchange (ISE) and Chicago Board Options Exchange's (CBOE) ten-day put/call volume ratio of 1.30 ranks above 77% of all those taken during the past year, as put buying gains momentum despite the stock's continued ascent.

Additional signs of rising pessimism are evident among short sellers and Wall Street analysts. For instance, the number of SBUX shares sold short jumped by nearly 37% during the prior month, while eight of the 22 analysts following the shares still rate them Hold. As you can see, this rising negativity is prevalent across the board for SBUX, and it could mean that the shares are far from reaching an end to their current rally.

Speaking of which, SBUX [has doubled] during the past 52 weeks, rallying along the solid support of its ten-week and 20-week moving averages. (The stock closed near $28 Wednesday—Editor.) Furthermore, the shares have gained more than 20% year to date, compared to the Standard & Poor’s 500 Index's loss of roughly 0.1%.

From a contrarian perspective, optimism levied against a rising stock is par for the course. Should SBUX's rally persist in the face of this onset of negativity, it could mean that the stock has plenty of room left to run.

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