Is Starbucks a Buy, Sell or Hold During the Coronavirus Selloff?

Down 50% at its lows, Starbucks is adequately discounting the risks from coronavirus. Here's a closer look at the stock.
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Understandably so, Starbucks  (SBUX) - Get Report stock has been damaged by the coronavirus selloff. 

Investors in this name are not surprised, given the company's exposure. First, Starbucks' multi-year growth strategy centers on China, where it was opening roughly 500 new stores a year. The country accounted for roughly 10% of revenue so when the coronavirus outbreak began there it was an obvious top-line risk for Starbucks.

As Covid-19 spreads throughout the world though, Starbucks is continually at more and more risk - it is a form of retail after all. As such, Starbucks is closing most of its locations in the U.S. and Canada for two weeks. 

That’s not a good sign, even though CEO Kevin Johnson explained to Jim Cramer on his “Mad Money” show that the company has been authorized to buy back 40 million shares. The company has a strong balance sheet, Johnson reasoned, while Starbucks is being “thoughtful and responsible.” 

That balance sheet will help the company weather the current storm, but the impact from Covid-19 is still largely unknown. When there’s uncertainty in the market, that often equates to “sell” for many investors.

Let’s look at the charts.

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Trading Starbucks Stock

Weekly chart of Starbucks stock.

Weekly chart of Starbucks stock.

Starbucks hit a post-earnings high of $99.72 in July and has been struggling for upside since. To be fair, shares more than doubled from the July 2018 lows until that point, but that’s doing little to comfort investors as Starbucks has seen a peak-to-trough decline of 49.1% at last week’s low.

That low mark came at $50.02 and right near long-term range support. The $47.50 to $50 zone was support for years. It temporarily gave way in the summer of 2018 before leading to a huge rally in the share price.

After knifing through all of its major weekly moving averages, as well as its prior breakout mark near $60, Starbucks is still searching for direction. It did have a nice reactionary bounce from the $50 area, but a retest of this zone is certainly not out of the question.

As a retailer with plenty of U.S. exposure, Starbucks is certainly at risk for more selling pressure. But if investors can begin to accumulate a position in the $47 to $50 area - down 50% from the highs - that seems to appropriately price that risk into the share price.

There will be hiccups over the next three to six months, and likely over the next six to 12 months. However, Starbucks operates a very solid business and should continue to do so once the coronavirus is put to rest.

For those that feel Starbucks is too risky, there is no shame in taking a pass. But in the long-term, Starbucks stock should recover these losses.