Trading Nation

After Starbucks’ record rally, trader says sell strength into year-end

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Trading Nation: Starbucks near record high ahead of investor day

Starbucks kicked off its investor day Wednesday in good shape.

The stock, which closed slightly lower on the day, is less than 3% from its record high set last week. The shares have also rallied more than 100% since a March low.

Mark Newton, founder of Newton Advisors, sees a little more energy in this rally, but warns against betting longer term.  

"The stock does have a lot of near-term momentum. That is certainly a good thing. However, when looking out three to six months or longer, I don't view the stock as really all that attractive of a risk reward at this level," Newton told CNBC's "Trading Nation" on Wednesday.

Using its relative strength indicator as a guide, he said the stock is headed toward overbought territory. Its weekly RSI measures in at just above 72. A reading over 70 typically suggests overbought conditions.

"While near-term investors could potentially still be long for a move up to $110, I just don't like the longer-term risk reward and if anything, it's really right to use strength to sell into by year-end in my view," said Newton.

Starbucks closed Wednesday at $100.40. A move to $110 implies roughly 10% upside.

Steve Chiavarone, portfolio manager at Federated Hermes, is more bullish on the prospects for Starbucks into 2021, basing that optimism on consumer strength.

"We're big fans of the consumer, and we think that the consumer is going to surprise to the upside next year. Disposable income is 5% higher than it was a year ago, the savings rate is at multidecade highs and consumers are sitting on roughly a $1.5 trillion of excess savings, and we think that the vaccine is kind of a 'GIs returning home from World War II' type moment where we're all going to want to go places we can't go today, do things we can't do today," Chiavarone said during the same "Trading Nation" segment.

He believes part of that spending should filter through to restaurants, even chains such as Starbucks that have mostly remained open during the coronavirus pandemic.

"As a broad category we think restaurants, quick service, places that aren't eating at home, are going to take share over the course of the next year. And we think, Starbucks' stock like many other restaurants, is starting to price that in," said Chiavarone.

Starbucks expects global same-store sales to increase between 18% and 23% in 2021 with especially strong growth in China.

The company announced at its investor day that it anticipates ongoing long-term revenue growth per year within 8% to 10%.