As an analyst who combines technical and fundamental analysis, I light up when I see a stock with solid fundamental growth on the verge of a technical breakout.
That's why I'm excited about the world's largest coffee chain, Starbucks (Nasdaq: SBUX). A strong technical picture is backed by an upbeat revenue and earnings outlook and could provide double-digit returns.
Growth in the Asia-Pacific segment was the company's strongest, with revenue in the region increasing 23% from a year ago. Europe, the Middle East and Africa (EMEA) are dramatically improving as well, rising from 1% sales growth in 2013 to a 13% increase during the quarter. The Americas saw a 10% rise in revenue from the year-earlier quarter. In total, Starbucks brought in $4.2 billion in revenue for the quarter, a solid 11% increase from the year-ago period.
Starbucks' worldwide store count is growing quickly. In the past year, it has opened the bulk of its new stores in the Americas and Asia-Pacific region, with over 1,550 new outlets in total expected for the fiscal year ending in September.
Over the next three years, Starbucks plans to open over 3,000 new stores in the Americas -- a key growth area. Through aggressive expansion and marketing, the company also plans to turn China into its second largest market.
Traders certainly appear optimistic about the stock.
SBUX has been in a major uptrend since it bottomed in August 2012 near $42. From there shares ran all the way to $82.50 in November 2013, almost doubling in less than a year and a half.
The stock pulled back to just under $70 by early February, rallied to the $78 area in March, and again fell below $70 in April. Following the April low, shares rallied strongly, nearing $82.50 resistance last week before pulling back.
This formation is marked by a large W shape. If SBUX can successfully penetrate the $82.50 peak, it could soar to new all-time highs since there would be no historical resistance to cap the stock.
According to the measuring principle for this basing formation, shares could potentially hit a new high of $97.32. This figure is calculated by subtracting the difference between the stock's peak and base, then adding this amount to the breakout level. At current levels, this target presents traders with nearly 25% potential returns.
However, to minimize the risk, I would buy shares only if $82.50 resistance is broken. Setting a buy-stop order at $82.51 would still present traders with 18% potential returns.
The bullish technical outlook is backed by solid fundamentals.
Upcoming fiscal fourth-quarter revenue is expected to rise 11% year over year to $4.2 billion, while earnings are estimated to increase 19% to $0.75 per share. For the full fiscal 2014 year, ended in September, analysts expect revenue to grow 11% to $16.5 billion. And sales are projected to jump another 11% in fiscal 2015 to $18.3 billion.
Management estimates earnings for fiscal 2014 of $2.70 to $2.72 per share, an increase of at least 19% from $2.26 per share last year. For fiscal 2015, the coffee chain said it expects to grow EPS an additional 15% to 20%.
Risks to Consider: Starbucks has warned rising coffee commodity prices could hurt profits. However, the company said it has hedged prices for 60% of its 2015 coffee requirements. While higher commodity prices could crimp the bottom line, the chain can compensate by raising prices. Since Starbucks drinkers are already used to paying top dollar, they're unlikely to flinch at forking over a few cents more.
Action to Take -->
-- Enter a buy-stop order on SBUX at $82.51
-- Set stop-loss at $73.26, slightly below support marked by the intersection of the major uptrend line
-- Set initial price target at $97.32 for a potential 18% gain by late 2014
P.S. -- Stocks like SBUX are similar to a special group of securities we call "Forever Stocks." These are world-dominating companies that pay investors a fat dividend (much more generous than SBUX's current 1.4% yield), dig a deep moat around their business to fend off competitors and buy back massive amounts of stock. They're solid enough stocks to buy, forget about and hold "Forever." To learn more about these stocks -- including some of their names and ticker symbols -- click here.
This article was originally published at ProfitableTrading.com:
Watch Starbucks' Chart Like a Hawk for This Breakout Buy Signal