SBUX SeeSaw – Which Way Will It Go?

Summary

  • Starbucks shows numerous positives and negatives going into earnings. Bears vs. Bulls.
  • High open interest and volume on both puts and calls. Which side will Prevail?
  • Growth Expected, but will it be enough?

Mixed Signals

Starbucks is showing mixed reviews going into earnings today (November 1st). Both positive and negative news has been coming out in the past few weeks and it poses the question: Who should you listen too?

The downside appears to be far greater for Starbucks $SBUX coming into Q3 earnings. I/we are setting our high end price target at $60 and low end price targets at $52. It will all come down to the companies performance in China. If growth continues to gain the stock will most likely continue on its upward trend that we saw throughout the rough month of October. Any dips in Chinese growth and Starbucks could drop as we saw two earnings calls ago.

Either way it is obvious this is a big earnings call for $SBUX. Short Interest is growing, but so is the number of calls being bought. At $58.81 Starbucks’ Jan 18, 2019 $60 calls had an astounding open interest of 26,246 while the similar Jan 18, 20 calls had an astounding open interest of 26,246 while the similar Jan 18, 2019 $60 put matches with 1 an open interest of 10,633. This high volume of calls and puts shows a large move is expected. So which side should you take?

Buying a put, although slightly riskier, has the potential to make much larger profits than the calls as I/we believe Starbucks is currently overvalued right now. $SBUX has a PE nearing 19 going into earnings while competitor Dunkin’ Donuts $DNKN has a PE of around 17 even after having a blowout quarter. As long as tension in China exists it will be hard for Starbucks to reach its full growth potential. Because of this I/we are bullish long term on Starbucks, but Bearish in the short term this earnings season. Recommendations are to buy put spreads going into earnings and then buying in the months ahead, and averaging down to potentially hold for the long term. A nice 2.46% dividend allows for a nice ride long term with $SBUX.

I/We are long Starbucks

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