As I was scouring the bargain bin this weekend for long-term investing opportunities, a couple of former market favorites stood out as potential candidates.
First let’s look at Starbucks (SBUX). Starbucks has suffered a monstrous demise over the past year. It began the year in the mid-$30s and sits at $25.53 at the close of business on Friday. The decline of approximately 30% combined with fears over consumer spending diminishing has some wondering if the glory days of Starbucks are gone for good. As Phil pointed out in Friday’s comments, Starbucks is so addictive that “People will skimp on their kids before giving up the coffee but the market has to see it in action”.
When I think of Starbucks, I think of the old Buffett comment when he was purchasing Coca Cola (KO) – “If you gave me $100Bn, I wouldn’t know how to displace them”. Starbucks is valued at approximately $19Bn but I would hazard a guess that with $19Bn it would still be a considerable challenge to replicate the success of Starbucks. They have become a cult phenomenon but that aside they have 10,000 domestic locations with plans to add 1,700 more stores in fiscal year 2008. Moreover, Starbucks has targeted an ultimate buildout of 40,000 stores with half of those locations outside the US. (Currency diversification anyone? Uh hum…China?)
With the stock out of favor, it’s difficult to get too bullish on the stock in the short-term but the long-term trade below might well be quite attractive:
SBUX Jan 2010 Strike 25 long calls for $6.20 (scaled)
The position could be scaled into over time and could offer a nice opportunity to hedge regularly with shorter term short calls. I wouldn’t commit to a full position right away but a partial position might be interesting while a further pullback to $23 would offer an attractive opportunity to add to the position.
Another interesting play now is Ebay, trading at $35 per share. Management repurchased $500M worth of shares and reported solid top and line numbers in addition to reasonable operating profits and cash flow figures. With 2007 top and bottom line estimates raised, almost $4Bn in cash and zero debt in addition to new Paypal partnerships with market favorites such as Blue Nile, Ebay is looking increasingly attractive at these levels. Sentiment has shifted bearish with recent downgrades from Bear Stearns and Deutsche Securities so again the short-term outlook is questionable but the following short-term trade might work if you were willing to take a long-term view (sounds like an oxymoron but it’s not – see below!).
Ebay 30/35 Nov bull put
Strike 35 Short Put $0.80
Strike 30 Long Put $0.10
Net Credit = $0.70
Maximum Risk = $4.30
If the stock rallies over the next two weeks prior to expiration or simply stays flat, the options will expire worthless in the short-term while if the stock drops back to its 200-day MA from which it just bounced or indeed continued lower, you would be obliged to purchase the stock at $35 per share minus the credit received from the bull put, $0.70, i.e. $34.30. As a result, the short-term trade would turn into a longer term investment.
An owner of the stock could regularly enter short calls against the stock and lower the cost basis substantially over time while waiting for the stock to rebound. It seems clear that the stock struggles to stay below $30 for any extended period of time so the risk/reward ratio is quite attractive if you have a long-term perspective.
Have a fantastic week!
OptionSage
