In Friday’s “Morning Meeting,” we dug into our inbox and found an excellent question raised by a member of the Investing Club. Starbucks – like Halliburton – has had a nice run lately. The Club trimmed some Halliburton on Thursday . Why not trim Starbucks too? I have a double-digit percent gain on shares accumulated over the past five months. It seems like I should take some off the table. I would appreciate your perspective on what I see as a similar situation, but two different stocks. -Clay In our video, we debated if it was time to take profits and pledged to come back with a definitive response. Our answer is yes, we would make a very small trim — 50 shares of our 750 share position in Starbucks (SBUX) — if we were not restricted from trading. We’ll also downgrade our rating to a 2, meaning we would wait for a pullback before buying. As Clay points out, Starbucks has had quite the run lately. The first leg was due to a bullish Investor Day event we centered our August investment thesis around . At the event, Starbucks management laid out an expansive reinvention plan to unlock efficiencies at its stores and an ambitious growth strategy. The second leg of the recent rally has been fueled by China loosening its once stringent Covid-related restrictions much faster than anyone expected six months ago. It was a complete 180 from the fears in October when SBUX tumbled on concerns that China would prolong its zero-Covid policy for longer after Chinese President Xi Jinping tightened his grip on power . This speculation hit the stock hard that day because China is a huge growth opportunity for the coffee retailer. Starbucks is targeting 3,000 new stores in China by its fiscal year 2025, implying a new store every nine hours over the next few years. While there was a lot of fear in the air about China, we kept our eye on the ball and added to our position into that weakness in the stock. Since that buy, Starbucks has rallied about 22% compared to a 1% gain in the S & P 500 . SBUX 1Y mountain Starbucks (SBUX) 1-year performance There is a lot to be bullish about in Starbucks’ future, but a lot of that good news is starting to get priced in. Shares are now trading at around 31 times its next twelve-month earnings. That’s a four-multiple turn from when we first started buying in August at around $85 per share. The higher multiple is justified by the improving margin outlook and China growth plan, but it also raises the stakes around execution. Out of prudence and general discipline after a big run, we’ll take some stock off the table the next time we are unrestricted. We’ll also increase our price target up to $120 as we still believe there is more upside here over the long term as China comes back and we see the benefits of the U.S. store investments. In addition, we believe it’s prudent to let a little stock go when the market is this overbought. Following Thursday’s positive session for stocks, the market pushed even deeper into overbought territory, according to the S & P Oscillator . The value on this technical indicator increased from plus 6.46% to plus 9.46%. As a reminder, any value north of 4% means the market is technically in overbought territory and potentially due for a pullback. It’s a sign that the buyers may have exhausted themselves and any piece of negative news could trigger some selling, kind of like what we saw Friday morning when the market freaked out over bank earnings that actually weren’t bad at all. It’s uncommon for the Oscillator to reach a value that high. The last time it happened was in November 2020. We went back and looked at how the market fared in the time it took to work off its then-overbought condition. The result was surprising. There was a pullback of about 2% five sessions later. But in the days it took for the overbought condition to completely work off, the Dow Jones Industrial Average actually moved slightly higher. The action was similar to the previous time before that in June 2020. Now, of course, the market back then was in a bull market fueled by a zero-interest rate policy by the Federal Reserve to support an economy on the ropes due to Covid shutdowns. Rates are much higher today, and it’s hard to figure out exactly where earnings will land in 2023, especially for tech. Ultimately, earnings are what drive stock prices. .DJI 5Y mountain Dow 5 years However, our interpretation of the S & P Oscillator and the recent stock market gains is that things could get choppy over the next few days, maybe weeks. But we don’t want to be too negative with the charts looking favorable , signs indicating that inflation is finally starting to come down, and the Fed no longer needing to be as aggressive as thought a few months ago. Bottom line Again, earnings will be the most important driver of stocks over the next few weeks and we will need to see them hold up. But with the Fed winning its battle against inflation, we’ll be looking for pullbacks and weakness to add to positions of profitable companies that trade at reasonable price-to-earnings multiple valuations. Some Bullpen names we are taking a hard look at are Deere (DE) and Caterpillar (CAT). We would love to see their prices come down. Another potential name is BlackRock (BLK), and we’ll follow up next week with a formal Bullpen post on the investment management company. BlackRock on Friday beat estimates with fourth-quarter earnings and revenue. (Jim Cramer’s Charitable Trust is long SBUX, HAL. See here for a full list of the stocks.) As a subscriber to the CNBC Investing Club with Jim Cramer, you will receive a trade alert before Jim makes a trade. Jim waits 45 minutes after sending a trade alert before buying or selling a stock in his charitable trust’s portfolio. If Jim has talked about a stock on CNBC TV, he waits 72 hours after issuing the trade alert before executing the trade. THE ABOVE INVESTING CLUB INFORMATION IS SUBJECT TO OUR TERMS AND CONDITIONS AND PRIVACY POLICY , TOGETHER WITH OUR DISCLAIMER . NO FIDUCIARY OBLIGATION OR DUTY EXISTS, OR IS CREATED, BY VIRTUE OF YOUR RECEIPT OF ANY INFORMATION PROVIDED IN CONNECTION WITH THE INVESTING CLUB. NO SPECIFIC OUTCOME OR PROFIT IS GUARANTEED.
In Friday’s “Morning Meeting,” we dug into our inbox and found an excellent question raised by a member of the Investing Club.
Starbucks – like Halliburton – has had a nice run lately. The Club trimmed some Halliburton on Thursday. Why not trim Starbucks too? I have a double-digit percent gain on shares accumulated over the past five months. It seems like I should take some off the table. I would appreciate your perspective on what I see as a similar situation, but two different stocks.
-Clay