A red-hot stock market naturally has to mean a top-flight company such as Starbucks (SBUX) is flying high, no? Not in this case, and that's a problem.
I was reminded of this after sitting in on TheStreet's founder Jim Cramer's monthly call with Action Alerts PLUS members. Shares of the coffee king have badly lagged the S&P 500 this year amid several quarters of slowing sales growth. Starbucks isn't a broken company by any means, but it's having its operational challenges and is bumping up against years of strong numbers. The reality is that Wall Street remains too bullish on the coffee giant's prospects over the next 12-months -- analyst models will likely be reset when Starbucks reports soon.
And the market appears to be positioning accordingly.
Starbucks is now the largest short in the restaurant sector with $1.6 billion of short interest, an increase of $754 million over the last month, according to S3 Research. "With three-quarters of a billion dollars worth of new short exposure hitting the tape over the last month, it looks like they [investors] expect the underperformance to happen sooner rather than later, snubbing both the Maple Pecan and Pumpkin Spice latte's effect on Starbucks' bottom line," writes the research outlet. Ouch.
Several worries on Starbucks into earnings (set for Nov. 2):
- McDonald's (MCD) is stealing the low-end of the business with aggressive deals on drip coffee. Stuff tastes pretty good.
- McDonald's has managed to produce legitimate iced drinks, at very sharp prices.
- Dunkin' Donuts (DNKN) has also become more aggressive on prices.
- Wall Street is under-estimating a guidance shock from Starbucks.
- Starbucks has more operational problems weighing on performance than many expect.
- Wage inflation in 2018 is an under-appreciated risk.
One digital play that isn't having any trouble is PayPal (PYPL) -- shares are hovering around an all-time high. Check out my chat with the company's CEO below.
And before I let you go, here is what Dunkin' Donuts CEO just told me about the coffee wars.
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