Shares of coffee giant Starbucks Corporation ( SBUX ) have been stuck in a grind lately returning a loss of almost 8% to investors so far for 2016. The losses outpace the S&P 500 total return of 3%, which could signal that Starbucks stock is being setting up for a comeback to jump in ahead of or a meltdown to avoid.
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SBUX has always been a Wall Street favorite, boasting analyst buy recommendations that have been higher than Apple Inc. ( AAPL ), Microsoft Corporation ( MSFT ) and Alphabet Inc ( GOOG , GOOGL ), meaning that there has been a chance that this overcrowded stock could hit a tipping point and turn against the bulls.
The Danger With Starbucks Stock
Currently, 83% of those analysts are ranking Starbucks stock a buy with the remaining 17% in the hold camp. Under normal conditions - where the trend was the investor's friend - we might feel more comfortable holding (not buying) SBUX stock, but given the technical situation, there is an increased sense of danger that the bullish crowd may begin to migrate away from the stock.
Like many stocks in the market, Starbucks shares have seen additional volatility of late, as the market tries to determine where the Federal Reserve and the global economy are heading. In SBUX's case, the volatility has the stock heading towards some critical technical support that will make the difference between its stock staying in a bull or bear market trend.
Since October, Starbucks stock has been breaking its long-term bullish trend by shedding 13% of its value. Now, the stock is heading towards a challenge at $54, a break of which would dip the stock into a bear market trend for the first time since 2009.
A move into a bear market for Starbucks stock will likely trigger two negative reactions. First, the technical traders will begin to sell to lock in profits as the long-term trend shifts. Second, support among the analysts that have been holding out on their buy recommendations will start to erode resulting in downgrades. This will certainly add selling pressure to SBUX stock.
From a fundamental perspective, Starbucks continues to show the signs of an expanding company as year-over-year revenue continues to outpace the broader market. The problem, at least from our model's perspective, is that the earnings growth that investors should expect to see with that growth has been absent.
So, what's the rub?
For now, investors already holding Starbucks stock with large profits may want to use the $54 level as their guide. A stop price just below this level would make sense from a profit-management standpoint as SBUX continues to lag the market, suggesting that there are other stocks that will likely work harder for their portfolios.
For the bears, a break below $54 looks to provide an opportunity to either short the shares or purchase put options on the stock to profit from our model's intermediate-term price target of $42, more than 20% lower than current prices.
As of this writing, Johnson Research Group did not hold a position in any of the aforementioned securities.
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