Starbucks: Not Feeling It Yet (NASDAQ:SBUX)

By Levi at Elliott Wave Trader; Produced with Avi Gilburt

We’re getting closer, but we’re not quite there. This refers to the target that our lead analyst Zac Mannes put out in the last article we shared with the readership. Zac’s primary scenario was and still is targeting the $65 area to complete this entire corrective structure. So, while we are well on our way, we’re not feeling it just yet. Here’s where we have come from and where we see Starbucks (NASDAQ:SBUX) heading next.

A Brief Recap

Back on February 29 we published “Out Of Steam Or Just Warming Up?“. You will note that there were 2 possible projections pointed out. This was not to simply be right with whichever path price chose. Rather, it was to allow the dynamic nature of the market to play out. What’s more, those that may be familiar with our work shared here will recognize that we view the market from a probabilistic vantage point. This means that we have a primary path and an alternative that appears less likely but still possible. With price being the ultimate arbiter, we have specific levels to either better confirm our primary scenario or tell us when to shift our opinion.

From May 6th, here is Zac’s latest update to the Wave Setup for SBUX:

Note how Zac has updated the key levels in the structure of price. Also, the SBUX stock has followed the primary path quite well up to this point. This is where fundamentals meet technicals and provide a powerful synergy for our methodology. Next, we’ll check in with Lyn Alden.

The Current Fundamental Snapshot

I am neutral on Starbucks at this time.

I was long the stock in my newsletter portfolio from September 12, 2018 to October 12, 2020, during which time it enjoyed 71% total returns compared to 27% for the S&P 500 (SPY). However, at that point I was no longer comfortable with the valuation relative to its risk profile, and so I sold it from the portfolio. The stock has had negative returns since then, although it has been a volatile journey up and down.

I occasionally re-examine the stock after it has large sell-offs, and while it’s at a more interesting valuation today than it was in late 2020 or during its all-time high in mid-2021, it’s not compelling enough to bring me back to owning it yet. If its growth is running into headwinds, then perhaps 20x earnings is still too rich, and 15-18x earnings is more appropriate for a more value-oriented Starbucks. I don’t have a firm view at this price level.

Over the past decade, Starbucks has taken on a lot of debt. It has a BBB+ credit rating.

If the balance sheet were pristine, then Starbucks’ stock could more comfortably justify a high earnings multiple, but their debt load limits their options somewhat. During the years of zero interest rates, it made sense for Starbucks to take on debt to fuel growth and buy back shares, but as we likely enter a period of structurally higher yields, it may act as a headwind against the company.

I’m not firmly bearish on the price after its recent sell-off, but I’d need to see a better risk/reward setup start to materialize to get me back to being bullish.

– Lyn Alden

A Potentially Prepossessing Setup For The Future

Once SBUX reaches the target area near the $65 region, what’s next? You will see on the chart above that Zac is projecting that low to be the final portion of a larger Primary fourth wave correction that began way back from the July high struck at above $125 a share way back nearly three years now.

Zac’s prescient projection has kept our members out of long-term trouble and some have even used it as a short setup as shared in our Wave Setups feature. Once this primary fourth wave does indeed complete, we will be looking for an initial reversal and then a corrective pullback. It is likely that the next wave up will strike new all-time highs and push the price to over $150 a share. But, alas, that is yet quite a way into the future. So, we will patiently await that scenario. In the meantime, it is probable that price will have a corrective bounce up in a lesser degree fourth wave and then one final low.

The Power Of Pinball In The Palm Of Your Hand

Avi Gilburt educates extensively regarding the beginnings of Fibonacci Pinball and how we continue to use this methodology every day. Here is a brief excerpt from one of the articles about the origin of Pinball:

While I was learning Elliott Wave on my own, I was trying to obtain a more ‘track-able’ and ‘tradable’ understanding of the fractal nature of the markets. This is probably what many struggle with the most. Specifically, it is when we say that within a 5 wave move, each impulsive wave breaks down further into 5 waves each, with some waves becoming extended.

Well, after much analysis and observation, I identified a standardized method to trade waves 3-5, once waves 1 and 2 were in place. Now, remember that this is a standardized method that is a most common phenomenon in the market, but markets can and do vary from this standardized presentation. In fact, when we deal with commodities or the VXX, often, we see extensions that far surpass the standardized extensions I present here. But, again, this scenario is seen very often in the markets and individual stocks, so I believe it is worthwhile to have a basic understanding of this structure to build upon.

This is something that I observed within the Elliott Wave structure, and have adapted it to a trading methodology, which I lovingly call Fibonacci Pinball.

– Avi Gilburt

Fibonacci Pinball Applied To SBUX Stock

In the chart shared in this article, you can see how we are in a 5-wave structure to the downside that should complete the larger [C] wave of the Primary fourth wave correction. It is the standards observed and established over many years of careful study that provide us with key levels in the structure of price and give us guidance going forward.

Once SBUX completes this move down, it will be a beautiful long-term setup. For now, we maintain a “Hold”. Inside that “Hold” rating are many opportunities for nimble traders.

Conclusion

There are many ways to analyze and track stocks and the market they form. Some are more consistent than others. For us, this method has proved the most reliable and keeps us on the right side of the trade much more often than not. Nothing is perfect in this world, but for those looking to open their eyes to a new universe of trading and investing, why not consider studying this further? It may just be one of the most illuminating projects you undertake.

(Housekeeping Matters)

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