Will the Rally Continue for Starbucks? What should be Your Strategy?

Starbucks (SBUX) is definitely a stock worth looking at despite the fantastic rally over the past five years. It’s a good growth story to bet on for the long term; however I don’t like their net profit margins that stand around 10% at present. Even their dividend yield of around 1.20% isn't really attractive. The most promising part of their business is that they are still expected to grow above 20% annually for next five years. Even its annual sales are expected to rise to $17 billion by 2015.
But, despite such a rosy outlook, the current valuations look a bit stretched. Its currently trading around 33 times price to earnings, has a price to sales ratio of around 2.90 and it price to book ratio nearing 10 times is simply beyond investors comfort level. So, purely on fundamental basis it’s looking expensive around current price levels. Now, let’s see where it stands technically.
Technical Readings from Starbucks Five Year Chart
There is no sign of weakness in the stock from a technical perspective. (Click chart to enlarge)

Why Starbucks looks overbought and can pullback in the short term

As you can clearly see on the chart, the stock is in a very strong up-trend. However, we can also see that it has a long history of reverting to its 50 day WMA and it even tests its support line often. Right now it is trading far above its 50 day WMA and its trend support line. Well, that does not mean that it cannot ride any further. But we should also consider the fact that the stock has rallied from around $10 to above $70 in less than 5 five years.
Price Forecast and a Reasonable Investment Strategy on Starbucks
So, my advice to investors would be to take a cautious stance in this stock around current levels, and also check if its valuation metrics fit their investment criteria. One could also think of booking part profits if the stock continues to rally in the short term. As far as fresh positions a considered, I would suggest going long in the stock if it fall to its 150 day WMA, which is right now close to the long term trend line support.
I expect the stock to correct in the short term, but I have a $100 target on the stock by the end of 2015. Even beyond that Starbucks should be able to grow its revenues around 20% annually, and any improvement in its margins should be taken as a strong positive. Long term investors should not panic even if we see wild swings in this stock in the near term. This stock is worth adding to your long term portfolio on reasonable dips.
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1 comment:

  1. The rally in Starbucks (SBUX) has continued. So based on my analysis above, one could start taking partial profits as now this stock seriously looks overbought. But, any dip below its 50 day moving average should be used to average out your buy price. Stay long for the long haul.

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