Starbucks Corporation

4/29/12

Last week we saw a strong performance in the stock market, aided by none other than Apple, who recorded the best quarter of earnings I’ve ever seen by a company, which surprised many analysts and propelled the Nasdaq up roughly 70 points on Wednesday.  Stronger than expected earnings have steadied the stock market, however, a bad GDP number on Friday along with what I think is going to be a bad unemployment number this Friday, should set up for another stock market sell off.  Coupled with that, is the yield on the 10-Year Note fell to its lowest level ever on Friday morning, which indicates great uncertainty is still in the marketplace.  As usual, I continue to like TLT, if for no other reason than to hedge your long stock positions. 

Keeping with the coffee theme of last week when I recommended Green Mountain Coffee Roasters, which I did buy the May 35 calls on, this week, I’m looking at one of their competitors and customers, Starbucks (SBUX).  After the market closed on Thursday, Starbucks reported a record Q2 as they earned $0.40/share (18% increase YOY) and revenues totaling $3.2B, good for a 15% increase YOY.  Operating income reached $430M, a 14% increase, along with a slight increase in operating margins, despite higher commodity costs (more on this later).  In the US Starbucks saw much better than expected numbers in net revenues with an increase of 10%, and comp transactions growing by 7%, despite a weak economy.  Perhaps the most important part of the Starbucks conference call is their bullish guidance going forward.  Management raised their Q3 guidance by 25% to $0.45-$0.46/share and Q4 EPS of $0.46-$0.48/share.  SBUX also raised full year guidance to $1.81-$1.84, good enough for a 20% increase over FY11.  They also increased their new store target to 1000 globally in 2012.  Based on management’s FY12 EPS guidance, Starbucks is trading at a still relatively expense P/E of 31, but with so much growth potential for this stock, the high P/E is warranted.  They just began rolling out their Blonde Roast in all US and Canadian locations, and will begin selling it all across Europe and Asia later this year.  Additionally, in March they announced they would begin selling their own single cup coffee makers called the Verismo, which will make espressos and coffee.  At the same time, they announced their expanded relationship with Green Mountain to being selling V-Cups for the Vue coffee maker sold by GMCR.  To bolster that relationship, Starbucks will begin selling K-Cups in stores this fall, bringing in even more revenue. 

Additionally, Starbucks began offering wines and beers at select locations in Seattle and if successful, will roll those offerings out across the US.  All of this, and I haven’t even gotten to their healthy beverage line-up they purchased a few months ago, which is just starting to take off.  Looking forward at operating margins, Starbucks’ second largest commodity, coffee, has sunk to its lowest levels since late 2010, and is technically broken down, leading to much lower coffee prices.  Assuming Starbucks keeps their prices status quo, they will easily increase profit margins, leading to a higher bottom line. 

However, not all is great with Starbucks.  Management cited very weak sales in Europe (decline of 1%), mainly due to economic uncertainty and an overall weak global economy.  That scared many investors as the stock sold off more than 5% on Friday to $57.43, almost 10% off all-time highs.  Analysts are concerned the situation is Europe isn’t getting any better, and if consumer confidence in the US drops, you may see sales at Starbucks drop as well.  My personal opinion is no, the European economy won’t be getting better anytime soon, and even if the US economy starts dropping, SBUX is such an integral part of people’s daily routines, they shouldn’t be negatively impacted.  I think there is still so much growth opportunity with this stock that this recent sell off, really being just profit taking from a stock that’s already up 23% YTD.  I think you can get into this stock on Monday around $57 and just let it go.  If you want, stop yourself out at $54.24, the 50 day moving average, a technical indicator it hasn’t crossed since late 2011. 

Full disclosure: I currently hold no positions in SBUX, but am long May 35 calls in GMCR.  I have no plans to buy any position in SBUX.        

Jeff Lewison

Green Mountain Coffee Roasters

4/22/12            

This coming week is going to be very important for the markets as Apple reports earnings on Tuesday afternoon, in what should be a make or break report for the entire stock market.  Of the last week, Apple dropped 5% and you saw the impact the stock has on the entire market…where Apple goes, so goes the stock market.  We’ll also get earnings this week from Exxon Mobile, Boeing, Arm Holdings, Texas Instruments and many more.  Additionally, we’ll get an update from the FOMC on their interest rate decision on April 25^th. 

            The stock I am recommending this week is one that has been getting slammed for almost an entire year so it is also my speculative stock of the month, but I think is now a low risk buy, Green Mountain Coffee Roasters (GMCR).  For those who don’t know, they engage in the specialty coffee and coffee maker business. The company sources, produces, and sells approximately 200 varieties of coffee, cocoa, teas, and other beverages in K-Cup portion packs and coffee in traditional packaging.  Most recently, the stock got hit hard when Starbucks announced they are making a competing coffee maker that will also allow users to make espressos.  However, at the same time, Starbucks announced an extended contract with Green Mountain to continue selling K-cups for the Keurig Coffee Maker.  The biggest reason analysts are so negative on the stock is that the company has two key patents that expire in September, and it’s unclear how much that will hurt the stock.  My opinion is that this isn’t anything new and that it’s already baked into the stock price.  Furthermore, the company has been riddled with accounting problems, which is never a good thing for the stock.  But again, I think that’s already in the stock price. 

            As much as there are bad things about GMCR, there are also a number of positives.  Late last year, the average analyst earnings estimate was for GMCR to earn $2.38/share.  However, that was recently raised to a consensus of $2.67/share, a 12% increase.   The stock is extremely cheap compared to its past P/E ratio, as it currently is trading at a measly 12x 2012 earnings and a Price-to-Earnings growth rate of just .50.  With a market capitalization of $6.85B, Green Mountain is growing quarterly revenues by more than 100% and earnings by over 4,000%.  The company has $84M in cash and a little over $400M in debt.  What’s interesting to note, despite all the negativity surrounding this name, analysts still have 9 buys, 2 holds and 1 sell on the stock.  So while there are some holes in the Green Mountain story, the balance sheet is very strong, the stock remains very cheap, and as I will point out shortly, the technicals indicate the stock may have bottomed at $40/share.

            As I stated earlier, what attracted me to this stock is the low risk entry level, with the stock closing at $44.26 on Friday (a good entry point for this stock).  The 52-week low is $34.06, but the lowest close was last November at $40.89, which is where I think you can put your stop, risking just 8% to the downside.  Now, where this get’s interesting is my interpretation of the charts to the upside.  Looking at a long dated weekly chart, $40.86 has been the floor for more than 2 years, and since breaking through that price in February of last year, the stock has put in a failed triple bottom, which is a very bullish technical formation.  (A failed triple bottom is when a stock trades down to the same price level three times, but fails to fall through that level.  It’s an indication that the stock has strong support and should be used as a floor).  Additionally, when the stock traded down to its 52-week low of $34.06, it completed a 5^th wave down, indicating the stock is sold out.  Looking at the Relative Strength Index (technical indicator that determines overbought/oversold conditions), GMCR has an RSI of 38, with 30 marking oversold conditions.  Currently, analysts have an $85 price target for the stock, which I think is way to high.  I’m looking for a move back to $54, which is slightly above the 50 day moving average and 23.6% Fibonacci retracement, and good for a 22% gain from Friday’s close.  Green Mountain reports earnings on May 2 so if you’re really worried about the downside, you can hold off, but again, you have a low risk entry right here and with such a large short interest in the stock (22%), any beat by the company will skyrocket this stock. 

            Full disclosure: I currently hold no positions in GMCR.      

Jeff Lewison

GET SHORT

4/16/12

This week I have had limited time to do homework on a particular stock, so I’m going to do something a little different.  Instead of recommending a stock or ETF, I’m going to give you my overall market opinion and where I see things going from here. 

            While long-term I am still very bullish the stock market, in the short-term, it’s awfully difficult to get excited about this market going much higher.  The most telling sign of where things are going, is by looking at the US Treasury market, and more specifically, the 10 Year Note (the benchmark for long-term interest rates).  As all of you know, I have been very bullish and have been recommending TLT for almost a month now, which just so happens to have been about the end of the sell-off in that market.  Looking at the chart of the 10-year Note (which can easily be found on cmegroup.com), you’ll see that it’s currently trading at less than 1% off the all-time highs.  Today’s close of 131’220 is the highest close since February 2^nd and the third highest close ever.  With unemployment not looking as great as it was a few months ago and with CPI lower than expected, along with poor housing numbers today, I don’t see significant upside to the economy in the near-term, which will lead investors to the safety of US Treasuries.  Looking at the technicals, the 10-year note has traded higher for 4 consecutive weeks, so clearly all the momentum is for treasuries to continue to trade higher. 

            The second indicator to look at are the charts of the Dow and S&P.  Not only have both indices fallen below the 50 day moving average, but both indices have formed textbook bearish head-and-shoulders patterns.  Again, this is only evident in the futures charts, not the cash market.  Looking first as the S&P 500, March 27^th was the decade high of 1419.75, a day in which the market put in a shooting star (bearish technical formation occurring at the highs where the stock opens high, trades higher, usually making new highs, only to close on the lows).  That particular day helped form the head and the rest was history.  Additionally, 1389.75 is the long-term 78.6% Fibonacci retracement, which after falling through it on April 8, re-tested that level twice, and failed both times.  All of this spells trouble for the S&P.  Looking at the Dow, it’s the same story, different market. 

            The third indicator that I’m looking at is how the Nasdaq is trading, and more specifically, what has happened to Apple over the last 5 trading days.  Apple was the leader on the way up, and is and will be the leader on the way down.  With Apple already 10% off all-time highs, and I believe it has another 5% to the downside, before I can recommend buying it again, the Nasdaq will continue to drop along with the S&P and in turn, the Dow.  Looking action in the options market, there was heavy buying of puts (bearish options) in Apple, which means big investors are betting on more downside.  As Apple ran from 400-640 in a matter of months, it’s always been my belief that “where Apple goes, the market goes.”  But this downtrend extends further from Apple.  Today there was heavy selling out of another stock that has gone straight up this year, Priceline.  While both stocks are very strong and both companies are even stronger, you’re finally seeing profit taking from the leading stocks and a movement into yield like Treasuries and dividend payers like Master Limited Partnerships, ConEd, Verizon, etc… 

               The last thing I’m looking at is the chart of the dollar.  A stronger dollar is bearish for US common stocks and is often considered a safe haven, much like the treasury market.  If you look at a long-term weekly chart of the dollar, you’ll notice a massive and perfect inverted head-and-shoulders that has been building since August 2009.  If you extend out to a monthly chart, the inverted H&S is still evident, along with a rounded bottom, another very bullish technical indicator.  I see the dollar continuing to rise to 85 by the end of the year, from its current level of 79.71.             

            All this being said, I see the S&P selling off over the next few weeks to 1340 (again looking at the futures), which would be about 25 points from here.  To protect yourself on the downside, you need to be in stocks that pay out big dividends like the one’s I have previously recommended.  Continue to be a buyer of TLT until it hits new all-time highs.  Stay away from the growth stocks that have led this market higher, because they will lead the market on the way down.  Keep in mind, 20 points is just a little more than a 1% move to the downside, but would be about a 6% downside move off the decade highs, which would be a real nice correction and a great entry point to own growth stocks again. 

Jeff Lewison

Consolidated Edison

4/8/12

            For those who don’t have access to the futures market like I do, hold onto your hats because Monday is going to be an ugly bludgeoning stemming from Friday’s horrendous jobs report.  Economists were expecting an increase of 220,000 jobs, while the report showed a measly increase of 120,000.  Look for more profit taking from some of the top performers so far this year, (i.e. AAPL, TJX, CMG, etc…).  That being said, you should continue to own the TLT, as interest rates plummeted on the jobs number.  With CPI and PPI, and the beginning of earnings season this week, I continue to see investors piling back into Treasuries looking for safety.  All that being said, continue to focus your attention on stocks that pay big dividends.  This week I am recommending a stock that pays a hefty 4.20% dividend and one that I have made a lot of money on in the past, Consolidated Edison (ED). 

ConEd provides energy services to residential, commercial, industrial and government customers in the US.  They provide electric services to almost 3.5M customers in New York City and gas to approximately, 1.1M customers in Manhattan, Bronx, Queens and Westchester.  They operate about 4,500 miles of mainline gas and 588,000 miles of service lines for natural gas.  ED is trading at just 15 times forward earnings, but cheaper than it’s historical P/E of 16.5.  The company recently increased their profits margins and operating margins to 8.12% and 17.31% respectively.  Now, it’s important to note that this stock does have a very high PEG ratio of 4.88 which explains why so many analysts are bearish on this stock with 0 buys, 13 holds and 7 underperforms, and an average price target of $58, which is about where the stock closed on Thursday.  While I agree that its run up a lot, I think the analysts have this one wrong, and are giving you a great opportunity to buy in with the dividend still above 4%.  I believe in the old adage that if nobody else in the world wants it, I DO.  Look at the TLT for case in point.  While the Fed has hinted that QE3 is off the board, interest rates will continue to remain low for the foreseeable future, which is bullish for utilities.

Looking at the technicals for ED, there isn’t much to write about.  It’s currently sitting right at the 50 day MA of $58.18, which is above the 61.8% Fibonacci retracement of $57.56.  That’s the price I would look to be a buyer at, and one in which you should easily see on Monday.   Looking at a weekly chart, the long-term uptrend line comes into play at $53.50, which is where you should stop yourself out on the down side.  There are some negatives on the chart…looking at a monthly chart; you’ll see an outside reversal bearish engulfing line (the monthly bar engulfs the entire body of the previous month when looking at a candle chart) that has yet to be challenged.  However, over the last 3 months, ED has been forming a rounded bottom, which usually signifies the low for the move.  I think that’s exactly what you’re getting here with this stock.

As for entry and exit points, I would wait until you see the stock trade down to $57.56 or lower, depending on how bad Monday turns out to be.  If ED trades higher, wait for the pullback.  As for exit points, Consolidated Edison has been a very consistent performer and it’s not a stock that’s going to move big one way or the other in dramatic fashion.  Additionally, I want you in this stock to hold onto for that nice dividend yield, but if you want to be safe, stop yourself out at $53.50, a price we haven’t seen since August of last year.  On the upside, I see ED trading to $62, but could take a while to get to.  Consolidated Edison is a great low risk play in a market that has already rallied sharply and is due for a pullback.

Full disclosure: I currently hold no positions in ED. 

Jeff Lewison    

Churchill Downs Inc.

4/4/12

As of the writing of this article, the broader markets have sold off sharply from their highs and the growth stocks were suffering the most, while the high dividend payers (i.e. KFT, VZ, ED, etc…) held up pretty well and outperformed.  While I think we could see a rally over the next couple days, I still see the markets trending lower, with the S&P trading down to 1375.  While I still favor the stocks that pay hefty dividends, this week I’m writing about a stock that is “in season,” Churchill Downs (CHDN).  The stock is currently trading at $59.00.  For those who are not too familiar with horseracing, Churchill Downs provides both horseracing content and technology for consumers and businesses.  The company offers gaming products through its casino in Mississippi and slots and video poker in Louisiana and Florida.  Along with running Churchill Downs in Louisville, they also own and operate Arlington Racecourse in my hometown of Arlington Heights.  Additionally, they offer 11 off-track betting facilities in Illinois, own Calder Racecourse in Miami, Fair Grounds Racecourse in New Orleans, along with 11 OTBs in Louisiana.  CHDN also operates a casino and hotel, Harlows Casino Resort & Hotel in Greenville, Mississippi and numerous other casinos throughout the United States. 

On March 12, Churchill reported their 4^th consecutive quarter of EPS beats, with earnings coming in at $0.25, compared to estimates of -$0.08, good for a whopping 412% beat!  Revenues came in slightly lighter at $149M, missing estimates by about $2M.  This recent beat caused the stock to rally about 8% the next day, and while the stock is now trading higher, I still want you in before the big race in May.  CHDN currently trades at 19 times forward earnings, which is a discount to the industry average of 22x.  The company has a PEG ratio of 2.89, while high, is worth every penny.  Churchill carries about $27M in cash and has $133M in debt, equaling almost $2/share in cash.  CHDN pays out a small, yet important 1.20% dividend, paying out only 16% of income, giving it plenty of room to raise the payout.  This stock is not heavily covered by analysts, but does have 3 strong buys and 1 buy with an average price target of $67.75, a 15% increase from its close on Wednesday. 

Technically, the stock looks very strong, having gapped up on Tuesday and traded relatively flat on Wednesday, it’s currently sitting just $1.00 off it’s all-time high.  Since reporting earnings, CHDN never fell below the 50 day moving average, which sits at $55.70.  That’s the level I would use as my downside risk.  Drawing an uptrend line off the 52 week low of $36.67, you can see that Churchill trades significantly above that line that comes into play today at $52.50. 

Full disclosure:  I currently hold no positions in Churchill Downs.

Jeff Lewison