Starbucks (SBUX) Gaining Ground Despite Horrendous Quarter

Starbucks Corporation (SBUX) stock is trading higher by nearly 6% in Wednesday's pre-market after the company beat top- and bottom-line fiscal third quarter 2020 earnings estimates. The coffee giant reported a loss of $0.46 per share on $4.22 billion in revenue, which marked a 38.1% year-over-year decline. Global and Americas comparative sales shared equal pain during the quarter, with each segment dropping around 40%. Higher average ticket sales offset the bearish metrics to some extent, but it wasn't enough to put earnings into the winner's column.

Key Takeaways

  • Starbucks quarterly revenue fell 40% or more in key markets.
  • Short covering may be driving this morning's buy-the-news reaction.
  • The $80 to $82 price zone marks strong resistance that may not get mounted at this time.

The strong "buy-the-news" reaction seems inappropriate, given the terrible quarter, but investors are apparently looking ahead to better times. Valuation will become a major issue in 2021 and beyond if the "new normal" after the pandemic run its course is below the long string of impressive results leading up to 2020. Ominously, many equities are already priced for perfection in an imperfect world that may have to suffer through a lethal second wave of the pandemic this winter.

Starbucks raised fourth quarter and fiscal year profit estimates while expecting a consolidated revenue decline of 10% to 15%. The company declared a $0.41 dividend, hoping to hang on to shareholders through the end of the crisis. Even so, projections into year end assume a rosier path than the first half of 2020, and the next pandemic surge, especially in overseas markets that have sprung back to life, could be devastating for the stock price.

A news trader makes decisions based on news announcements. Breaking news, economic reports, and other reported events can have a short-lived effect on the price action of stocks, bonds, and other securities. News traders try to profit by taking advantage of market sentiment leading up to the release of important news and/or trading the market's response to the news after the fact.

Starbucks Long-Term Chart (2000 – 2020)

Long-term chart showing the share price performance of Starbucks Corporation (SBUX)

A long-term uptrend ended at $6.41 in 2001, giving way to a bear market decline that bottomed out after the Sept. 11 attacks. The stock posted a new high in the third quarter of 2003 and booked dramatic gains during the mid-decade bull market, topping out near $20 in the second quarter of 2006. It broke down from a double top pattern in 2007, entering a steep decline that accelerated during the 2008 economic collapse. The selloff found support in November within 16 cents of the 2003 low, yielding a strong bounce that reached the prior high in 2011.

A breakout carved a well-defined Elliot five-wave pattern into the fourth quarter of 2015, when the stock topped out once again. A 2017 rally attempt failed, ahead of a successful 2018 effort that posted impressive gains into July 2019's all-time high at $99.72. The stock posted a lower high in February 2020 and collapsed with world markets, failing the breakout before hitting a 20-month low in March. The subsequent uptick reinstated the breakout, reinforcing support in the low $60s.

Elliott Wave Theory was developed by Ralph Nelson Elliott to describe price movements in financial markets, in which he observed and identified recurring, fractal wave patterns. Waves can be identified in stock price movements and in consumer behavior. Investors trying to profit from a market trend could be described as "riding a wave."

Starbucks Short-Term Chart (2018 – 2020)

Short-term chart showing the share price performance of Starbucks Corporation (SBUX)

The stock is trading just above the 200-day exponential moving average (EMA) near $79 after earnings, marking the first ascent above this critical level since June. However, strong resistance at the February double top breakdown between $80 and $82 argues for caution at this time. Given bearish metrics in play prior to earnings, it's likely that short covering is feeding the upside this morning rather than fresh buying interest. This force of nature may be insufficient to greatly improve the technical outlook.

The on-balance volume (OBV) accumulation-distribution indicator follows this cautionary theme, entering a holding pattern in April after a brief flurry of buying power. OBV is positioned high enough in the broad pattern to act as a rally springboard, but the lower red line isn't likely to get mounted before the upper red line. In turn, bulls should watch the $80 to $82 price zone for directional clues.

The Bottom Line

Starbucks stock is gaining ground in a "buy-the-news" reaction after a horrendous quarter, but short-term upside may be limited.

Disclosure: The author held no positions in the aforementioned securities at the time of publication.

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