Market Overview

Not The Way To Fight Starbucks

Plenty of Americans love Starbucks (Nasdaq: SBUX) and it's not a stretch to say the company is quite popular in dozens of international markets. The stock is also a hit once again. Despite trading lower today by almost 1%, shares of Starbucks are flirting with all-time highs and are coming of a 2011 run that saw the stock surge over 45%.

That's good news for shareholders, but there's bad news for those that just have to have their Starbucks coffee everyday. The company announced it's raising the price of a tall cup of coffee by 10 cents in select regions. The company didn't say exactly which states will see the price hike, but USA Today reported the regions include New York, Washington, D.C. and most Southern states.

Other cities where it will raise prices include Boston, Atlanta, Dallas and Albuquerque, the paper reported.

Seattle-based Starbucks cited increased competition in select markets and rising commodities costs as reasons for the price hike.

Assuming the rising commodities theme is one Starbucks has to deal with for an extended period of time, the iPath DJ-UBS Coffee TR Sub-Index ETN (NYSE: JO) might appear to be a good bet. "Appear" being the operative word.

JO was jolted to downside by almost 12% last year and the ETN is trading far closer to the bottom end of its 52-week range than it is to the top end. Worse yet for JO is the fact that coffee supplies are forecast to increase this year.

With the ETN already trading more than 13% below its 200-day moving average, increased supplies could easily force coffee futures lower, in turn forcing JO to violate support around $52. Simply put, JO isn't the way for investors to get their caffeine fixes at the moment.


ACTION ITEMS:

Bullish:
Traders who believe that the coffee investment theme has legs, might want to consider the following trades:
  • Long Starbucks. The company has the type of brand loyalty that affords it an occasional price increase.
  • Long McDonald's (NYSE: MCD). The Dow component has become a legitimaet rival to Starbucks.
  • Long Dunkin Brands (Nasdaq: DNKN). Dunkin is another main Starbucks rival with lower prices.
Bearish:
Traders who believe that coffee prices might slide may consider alternative positions:
  • Short JO. The ETN isn't optionable.
  • Short the PowerShares DB Agriculture Fund (NYSE: DBA), which has coffee exposure.
  • Long puts on coffee futures.
Neither Benzinga nor its staff recommend that you buy, sell, or hold any security. We do not offer investment advice, personalized or otherwise. Benzinga recommends that you conduct your own due diligence and consult a certified financial professional for personalized advice about your financial situation.

Posted-In: Long Ideas News Bonds Short Ideas Specialty ETFs Technicals Commodities Markets Best of Benzinga

 

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