Why Starbucks’ Stock Rally Won’t Last

(Note: The author of this fundamental analysis is a financial writer and portfolio manager.)

Starbucks Corp.'s (SBUX) stock has risen by 13% since the middle of July. Now shares may rise even higher over the short term, by as much as 5%. It means the stock may increase by as much as 25% from its July lows based on technical analysis. 

But, one should not expect the stock's recent rise to last. Earnings growth is forecast to slow in 2019. Meanwhile, shares are no longer cheap, trading a 2019 price to earnings ratio of 22.  (For more, see also: Starbucks' Stock May Fall 10% on Weaker Growth.)

SBUX data by YCharts

Technical Chart Is Strong

The short term does offer prospects for the stock to continue its recent move higher. The technical chart shows the stock breaking out and rising above a long-term downtrend. Shares may continue to rise to their next level of technical resistance at $60.

The relative strength index (RSI) is also suggesting the stock will fall. It is currently at overbought levels, with a reading well above 70. 

No Longer Cheap

Starbucks currently trades at 22 times 2019 earnings estimates which is not cheap. That is because earnings growth in 2019 is forecast to slow to 10% from 16% in 2018. It means investors are paying more than double the company's earnings growth rate. It gives the stock a growth adjusted PEG ratio of 2.12.

Revenue growth is also expected to slow in fiscal 2019 to 6%, down from 10% in 2018. 

SBUX Annual EPS Estimates data by YCharts

No Upside

Even the usually optimistic analysts see minimal upside to Starbucks. The average price target on the stock is calling for the shares to rise by 1.5% to $58.20. 

Headwinds

The stock is facing possible headwinds, as a result of increasing trade tensions between the U.S. and China, while the company continues to grow its business in China. Additionally, the company has struggled to reignite its growth in North America. (For more, see also: Starbucks-Alibaba Challenged by Tencent in Coffee Business.)

The short-term charts for Starbucks look strong with momentum favoring shares rising. But for the stock to maintain that momentum, the company will need to convince investors it has solved its long-term growth issues. 

Michael Kramer is the Founder of Mott Capital Management LLC, a registered investment adviser, and the manager of the company's actively managed, long-only Thematic Growth Portfolio. Kramer typically buys and holds stocks for a duration of three to five years. Click here for Kramer's bio and his portfolio's holdings. Information presented is for educational purposes only and does not intend to make an offer or solicitation for the sale or purchase of any specific securities, investments, or investment strategies. Investments involve risk and unless otherwise stated, are not guaranteed. Be sure to first consult with a qualified financial adviser and/or tax professional before implementing any strategy discussed herein. Upon request, the advisor will provide a list of all recommendations made during the past twelve months. Past performance is not indicative of future performance.