Starbucks Shares Look Like They'll Pop Then Drop

Starbucks Corporation SBUX stock has been laboring through 2014 with a net negative performance year-to-date. Shares are back in correction mode after an April to July rally. How much further can they drop?

Starbucks shareholders have been in endurance mode ever since the stock made its all-time high in November of 2013. The company has been working to find new revenue sources after sprinkling stores all over the place, nearly reaching full market saturation. After a nice bounce off the lows in April, will the current correction lead to another leg higher, or a deep retracement of the rally?

The SBUX Bulls V. The SBUX Bears

The bullish camp loves the company's steady positive cash flow ($1.82 billion in levered free cash flow), clean balance sheet (current ratio of 1.16 and debt-to-equity of 40 percent), good management effectiveness ratios (return on assets of 16.78 percent as an example) and nice revenue and earnings growth projections (10.9 percent and 17.9 percent respectively).

Meanwhile the bearish camp points out that while Starbucks has nice growth projections, the stock is priced for perfection with a price-to-book of 11.55 and a price-to-earnings ratio of 25 – fairly high compared to the growth projections in the teens. Bears also note that SBUX shares are clearly in correction mode and argue that better entry points will be seen by those who have the patience to wait.

Reading The Chart

What does the chart indicate?

The SBUX chart tells technicians that a rise up to around $79.18 may very well take place prior to the remainder of the downside correction playing out. The eventual downside target – according to the technical crowd – comes in at $74.52. According to technicians, that level represents horizontal line support along with the 100 percent Fibonacci price projection line for what technicians speculate may be an “abc” downside correction.