Roof Leaker To Watch: Starbucks (SBUX)

Editor's Note: Any reference to TheStreet Ratings and its underlying recommendation does not reflect the opinion of TheStreet, Inc. or any of its contributors including Jim Cramer or Stephanie Link.

Trade-Ideas LLC identified Starbucks ( SBUX) as a "roof leaker" (crossing below the 200-day simple moving average on higher than normal relative volume) candidate. In addition to specific proprietary factors, Trade-Ideas identified Starbucks as such a stock due to the following factors:

  • SBUX has an average dollar-volume (as measured by average daily share volume multiplied by share price) of $226.4 million.
  • SBUX has traded 3.7 million shares today.
  • SBUX is trading at 2.87 times the normal volume for the stock at this time of day.
  • SBUX crossed below its 200-day simple moving average.

'Roof Leaker' stocks are worth watching because trading stocks that begin to experience a breakdown can lead to potentially massive losses. Once psychological and technical resistance barriers like the 200-day moving average are breached on higher than normal relative volume, the stock may then be subject to emotional selling from investors that can continue to drive the stock lower. Regardless of the impetus behind the price and volume action, when a stock moves with weakness and volume it can indicate the start of a new, potentially dangerous, trend.

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More details on SBUX:

Starbucks Corporation operates as a roaster, marketer, and retailer of specialty coffee worldwide. Its stores offer coffee and tea beverages, packaged roasted whole bean and ground coffees, single serve products, and juices and bottled water. The stock currently has a dividend yield of 1.4%. SBUX has a PE ratio of 241.3. Currently there are 16 analysts that rate Starbucks a buy, no analysts rate it a sell, and 4 rate it a hold.

The average volume for Starbucks has been 3.5 million shares per day over the past 30 days. Starbucks has a market cap of $58.0 billion and is part of the services sector and leisure industry. The stock has a beta of 0.93 and a short float of 1.2% with 2.44 days to cover. Shares are down 2.9% year-to-date as of the close of trading on Thursday.

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TheStreetRatings.com Analysis:

TheStreet Quant Ratings rates Starbucks as a buy. The company's strengths can be seen in multiple areas, such as its revenue growth, increase in net income, good cash flow from operations, largely solid financial position with reasonable debt levels by most measures and growth in earnings per share. We feel these strengths outweigh the fact that the company has had somewhat disappointing return on equity.

Highlights from the ratings report include:
  • The revenue growth came in higher than the industry average of 5.6%. Since the same quarter one year prior, revenues rose by 11.2%. Growth in the company's revenue appears to have helped boost the earnings per share.
  • The net income growth from the same quarter one year ago has significantly exceeded that of the S&P 500 and the Hotels, Restaurants & Leisure industry. The net income increased by 22.7% when compared to the same quarter one year prior, going from $417.80 million to $512.70 million.
  • Net operating cash flow has increased to $850.10 million or 27.77% when compared to the same quarter last year. The firm also exceeded the industry average cash flow growth rate of -5.13%.
  • The current debt-to-equity ratio, 0.40, is low and is below the industry average, implying that there has been successful management of debt levels. Despite the fact that SBUX's debt-to-equity ratio is low, the quick ratio, which is currently 0.62, displays a potential problem in covering short-term cash needs.
  • STARBUCKS CORP has improved earnings per share by 21.8% in the most recent quarter compared to the same quarter a year ago. This company has reported somewhat volatile earnings recently. But, we feel it is poised for EPS growth in the coming year. During the past fiscal year, STARBUCKS CORP swung to a loss, reporting -$0.01 versus $1.79 in the prior year. This year, the market expects an improvement in earnings ($2.67 versus -$0.01).

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