Starbucks Goes on the Watch List

Coffee retailer Starbucks (SBUX - commentary - Cramer's Take) has had a rough ride the last 18 months or so, but there are a number of factors in play that have prompted us to put the stock back on our screens as a potential long.

The stock was one of our better-performing names of the last few years, off the March 2003 bear market bottom, but when it put in a double top at $40 in late 2006, we immediately started selling the name in 33% increments, finishing our sales in the high $20s in May 2007.

Fundamentally, three things gave us pause coincident with the technical double-top at $40 per share:

1. At their fall 2006 analyst meeting, SBUX said it was going to stop reporting monthly comps; this told me that the high-single and low-double-digit comps of the past three years were likely ending. The logic being, when does a company ever voluntarily stop reporting good news?
2. In the fall of '06, SBUX management announced it was lifting its store-count goal to 40,000 stores worldwide. The stock got a huge lift when management took the store count from 15,000 to 30,000, but it still couldn't make a new high.
3. SBUX hiked prices again in late '06; this is becoming an increasingly frequent method to keep comps positive vs. driving foot traffic through the store.

That being said, I believe we are much closer to a bottom than to a top in the stock, as the technicals reflect.

The following charts show that SBUX is currently riding its 200-week and 50-month moving averages, which should act as solid support for the stock over the next few months. The monthly chart shows that stock has held the 50-month moving average in 1998 (Long Term Capital crisis), 1999 (kozmo.com) and the post-Sept. 11 selloff in 2001, and we are trading right on top of that level today.

Starbucks Weekly Chart

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Source: Worden.com

Starbucks Monthly Chart

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Source: Worden.com

In addition, as we see with Thursday morning's analyst downgrade to sell, quite a bit of positive analyst sentiment has come out of the stock. SBUX has used a lower tax rate and share repurchases to meet estimates the last two quarters so -- as analyst ratings reflect -- the quality of the EPS "meet" hasn't been great, and analyst ratings have come down accordingly.

I'm a big believer that technicals presage changes in fundamentals. SBUX is now as oversold as it was in the fall of 1999 when Howard Schulz and the SBUX management team had to take the write-down on kozmo.com (some kind of an in-store movie drop-off or Blockbuster-type knockoff). The monthly chart indicates this, showing how the stock traded down from the (pre-split-adjusted) $37 to the low $20s.

Bottom line: We are nearing a point where technicals look much better, sentiment is negative, and the fundamentals haven't changed much. This is usually a good point to start at least monitoring a name and getting your buy limits set. Since the July earnings report, and per the latest First Call data, analyst earnings and revenue estimates haven't changed much, despite the negative sentiment around the name and around retail in general.

The September 2005 low for SBUX was $23. The stock should have excellent and rock-solid technical support between $23 and $25.

We kept a small position in long-term accounts, so be patient, but again, I believe we are much closer to the bottom than the top in 'BUX.

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At the time of publication, Gilmartin was long Starbucks, although positions can change at any time.

Brian Gilmartin, CFA, founded Trinity Asset Management (TAM) in 1995, where he is currently a portfolio manager. Under no circumstances does the information in this column represent a recommendation to buy or sell stocks. Gilmartin appreciates your feedback; click here to send him an email.