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Options Players Shrug off Starbucks Corporation’s Bleak Outlook

December 26, 2008 by Jocelynn Drake

On Wednesday, news hit the Street that Starbucks Corporation
(
SBUX |
Quote |
Chart |
News |
PowerRating)
may be joining the ranks of many companies that are no longer matching contributions to their 401(k) retirement plans. In a memo sent to workers last week, Starbucks said it will switch to a “fully discretionary match” program from a fixed employer match as of Jan. 1. “This means that at the end of calendar year 2009 and future years, Starbucks will make a decision whether or not to make matching contributions to plan participants,” said the memo.

“If a matching contribution is made, Starbucks may do so using a rate that is different than the tenure-based fixed rate currently in place for the 2008 plan year,” the letter added.

Meanwhile, on Dec. 4, the company warned that it no longer expects to meet analysts’ consensus estimate for earnings in its fiscal first quarter ending Dec. 28. The consensus estimate at the time stood at 22 cents per share. Starbucks has failed to stop its slide in sales growth that began a year ago, as consumers started to rein in spending.

Despite the bleak outlook from the coffee king, options players are expecting the shares to bounce back. The International Securities Exchange (ISE) reported that 1,380 calls were purchased on Wednesday, compared to just 16 puts. In other words, 86 calls were purchased to open for every 1 put.

What’s more, the Chicago Board Options Exchange (CBOE) reported that 539 calls were purchased on Wednesday, compared to 164 puts, resulting in a call/put ratio of 3.29.

This preference for calls is a growing trend for SBUX. During the past 10 trading days, the ISE has reported an average of 3.25 calls purchased to open for every put bought to open. This ratio of calls to puts is higher than 95% of all those taken during the past year, underscoring the wave of optimism that is washing over the shares.

Overall, the Schaeffer’s put/call open interest ratio for SBUX stands at 0.35, as call open interest more than doubles put open interest among options set to expire in less than 3 months. This reading is also lower than 94% of all those taken during the past 52 weeks, indicating that short-term options speculators have been more optimistically aligned just 6% of the time during the past year.

Wall Street has a somewhat bearish outlook for the security. Zacks reports that the stock has earned 3 “strong buy” ratings, 8 “holds,” and 1 “sell.” However, there is still ample room for additional downgrades, which could pressure the equity lower.

In addition, price-target cuts could plague the shares. The average 12-month price target for SBUX stands at $13.40, according to Thomson Financial. This estimate implies that analysts are expecting the shares to rally more than 43% during the next year. Lowered expectations from this group could weigh on the stock.

Some of this optimism comes from SBUX’s recent rebound from its Nov. 21 low of $7.06. The shares have rallied more than 32%, but have since pulled back from their near-term highs. The equity has hit resistance at its declining 10-week moving average — a trendline that has guided the security lower since November 2006. Additional staunch resistance resides at the round-number 10 level. A rejection at this region could send the stock down for another test of long-term support in the 7 region.

 WEEKLY CHART OF SBUX SINCE SEPTEMBER 2006 WITH 10-WEEK MOVING AVERAGE

In summary, traders should keep a close watch on resistance at the equity’s declining 10-week moving average. A failure to overcome resistance in this region could signal that the stock is poised to resume its long-term downtrend. Furthermore, the growing optimism on this underperforming security has bearish implications from a contrarian perspective. An unwinding of this optimism could spell trouble for SBUX.

Newly revised and updated, Bernie Schaeffer’s home study program, “10 Days to Successful Options Trading,” provides a foundation for your options trading success. Includes easy-to-follow guide, CD, DVD, and a special report — Click here to learn more.

Copyright Schaeffer’s Investment Research. www.schaeffersresearch.com.

Filed Under: Recent, Trading Lessons, Trading Lessons

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