The Small Short
Starbucks jumped thanks to Niccol, but shares of the coffee giant are vulnerable
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I’ve never been comfortable with a portfolio that is 100% long.
Certainly, in a bull market like the one we’re currently experiencing, you want to lean heavily to the long side, but there is no need to be exclusively long.
Many of us run our portfolios as if they are mutual funds, when we could instead run them as if they were hedge funds. That means adding the occasional short position to the mix, even if it comprises just a small portion of the overall portfolio.
When we think of all the stocks that aren’t participating in this bull run, opportunities on the short side become evident. There are also opportunities in stocks that have ascended to higher levels than they currently deserve.
There’s one company in particular on my radar for a short trade right now. This name was up big recently but may have gotten ahead of itself. I’m talking about retail coffee giant Starbucks SBUX.
Seattle-based Starbucks has gained 22% this month alone, thanks to news of the addition of incoming CEO Brian Niccol. Niccol was poached from Chipotle Mexican Grill (CMG), where he had a successful six-year run.
That rally has caused Starbucks to blast above its 50-day (blue) and 200-day (red) moving averages, but the stock is having difficulty with a bearish trend line that has been intact for well over a year (black descending line). On three separate occasions, shares of Starbucks were rejected at that line (red arrows).
In addition, Starbucks and other coffee retailers are dealing with higher input prices. Coffee futures have been steadily rising, and are trending higher in the near-term.
Shorting Starbucks here, and exiting with a small loss if the price breaks above the stock’s trend line, is a sound strategy. Is there a low-risk way to take this trade?
I'm not planning to take a naked short position in Starbucks. Buying puts would have the same effect as selling short, with the added benefits of leverage and a limited, well-defined potential loss. The November 90 puts are fairly priced, and provide sufficient time for this trade to play out.
This trade isn't a knock on Niccol. The market obviously prefers him to outgoing Starbucks CEO Laxman Narasimhan. Niccol brings a great reputation from his six years at Chipotle, as well as his seven years at Taco Bell, where he was chief marketing and innovation officer.
The problem with Starbucks is that it’s in the wrong type of business for the current economic environment. Starbucks provides discretionary products, at a time when consumers are still reeling from the worst bout of inflation in over forty years.
That reality was reflected in Starbucks’ chart prior to the addition of Niccol. I expect the dominant bearish trend in this stock to resume.
