Shorting Starbuck's
Descending Triangle
Everyone has Starbucks
in their sights as shown by McDonald’s recent
move into latte’s, mocha’s and ice blended
frappe’s with custom coffee bars and specially
trained baristas being introduced to be sold alongside
their burgers and fries. One of Starbuck’s older
competitors, Dunkin Donuts, last week announced free
latte and mocha drinks for the brief time period that
Starbucks closed their doors nationwide.
Starbucks
has dropped from close to $40 a share down to its
Friday close at $17.10. At this level SBUX is fairly
priced as reflected by the following table;
McDonald’s,
being the market leader is awarded a higher P/E, and
this company certainly has the size and capability
to scare anyone should they decide to jump into their
specialty market with both feet. Just as MsDonald's
commands a premium P/E as the market leader in their
space, Starbucks used to command a premium P/E as
the leaders in their market niche. This seems to be
no more.
This is exactly
what is worrying investors about this the one time
market darling and the king of caffeine. How badly
will McDonald’s hit Starbucks by moving into
upscale coffee and did Starbucks over-expand over
the past few years? Here in Manhattan I can walk to
two McDonald’s within five minutes, but I can
also walk to three Starbucks. One Simpson’s
episode has Bart going to the mall and every single
store in the mall is a Starbucks. While this is just
a commentary on American pop culture, it does make
a point.
The chart below
shows SBUX breaking to new lows out of a descending
triangle. The fundamentals shows the king of caffeine
as fairly valued, but as we invest in a stock in anticipation
of future earnings and potential – having the
colossus of burgers playing in your backyard is a
bit scary and this could award SBUX with a lower P/E
equilibrium and growth level. This comes vis-à-vis
a lower price.
Starbucks broke
down to new lows last Thursday and Friday in the market
sell off. This breakdown also signaled the breakdown
of a descending triangle at $17.82 and closed Friday
at $17.10.
The two green
dotted lines indicate where the triangle may have
started with the upper line being a more 'sloppy'
triangle. Also, the triangle formed with the lower
green line shows the breakdown to be within the more
reliable 2/3 to 3/4 breakdown range of a descending
triangle.
A descending triangle
is a measuring pattern. Measuring patterns show you
the target price that the pattern is forecasting the
stock will move to.
20.45 - 17.82
= 2.63
17.82
- 2.63 = $15.19
How to
play this Descending Triangle;
1- Aggressive)
Get a short off at market on Monday's open.
2 - Conservative)
Offer a short position out waiting for a pullback
to the Triangle's horizontal line in the 17.60 to
17.80 area. You may not get into the trade with this
strategy.
3 - Protective
Stop) After getting into a short position, place a
protective stop just above 18 in the $18.06 to $18.16
area.
4 - Taking
a piece off the table) Cover half your poisition at
16.12 and move your protective stop to your trade
entrance price for the position still in action in
order to guarantee a profitable trade.
This
pattern targets $15.19 as the price that Starbucks
will fall to and where a short should be covered.
I prefer to use a target price to exit a trade a few
cents in front of the nearest 'round number'. I would
cover this short at $15.27.
To learn more about Descending Triangles
see Stock Trading Cards T14, T15 and T16 and watch
Lecture 4. Visit www.StockTradingCards.com
~Robert Perrego
Disclosure –
no current positions in SBUX, but I may be putting
this short on Monday.
3/7/2008 4:25
PM
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