Wednesday, February 1, 2017

Short Cup

No, the title is not a nickname to describe my girlfriend, but refers to my morning medicine, java, a cup of jo. I could care less in what size my elixir arrives at a local establishment as long as the mug is clean and they offer refills. I do like the aroma of vanilla and the taste of hazelnut, but a good smooth bean is all I really need. Since Starbucks made headlines on Friday, I decided to take a closer look at the coffee king. Under disclosure, I like Starbucks coffee, but their prices are high and no refills keeps me walking to a more price friendly venue.
BOGO = Buy One Get One Free
The chancellor of Germany, Angela Merkel blasted the coffee chain as a poster child for avoiding taxes and even questioned whether Starbucks pays any taxes to any country? She was attacking two political issues with one target.
First, she was changing the political atmosphere in Germany from refugees and offering a reason for Germany's recent recessionary situation. Starbucks hurts German coffee houses and pays no local taxes while local merchants still have this burden. This gives Starbucks an unfair advantage. The anti-American fast food theme always plays well in Europe. Secondly, she was sending a message to Trump concerning international trade. She is testing the waters for this issue in 2017. She is also seeking another term in office in this election year. She plans on hammering on this nail using Starbucks as the villain in her election campaign.
EU and Taxes
The EU is also after Starbucks. They say the company owes back taxes in Europe to the tune of $32 million. Starbucks is fighting the claim as it says, it has a deal with the Netherlands and Luxembourg.
In Hollywood, they say there is no such thing as bad publicity, but poor public press doesn't play well on Wall Street.
Charts, Gap and Refill
As I refill my cup from my GLW coffee pot(they make the best home perked coffee), I checked the charts on Friday's price action. SBUX gapped down by 4% on huge volume. This is never a good sign. I further checked back in time all the way back to 2009. Starbucks may not offer refills, but they filled the pockets of investors to the brim. The stock rose from $3.50 a share to over $64 in 2016 in a straight upward move. Sorry, I missed that.
Now, I see a different opportunity. As stated, the stock went straight up like a rocket ship, but as time passed, the volume of buyers is shrinking. This is also not a good sign. The market at present is very bullish, especially with the recent milestone of 20K. I think the gap gets filled, however it will only need one point to accomplish this window. With a PE/ratio only a fraction under 29(high), with more bad press in the works, problems with coffee beans in Brazil and international trade as a political issue in 2017, Starbucks could retrace back to $40 to which makes it a nice short as in short cup. The key will be the volume refilling the gap. If it stays light that will be a green light to short this cold cup of coffee.