Why You Should Pay Attention To Starbucks' Downgrade

Why You Should Pay Attention To Starbucks’ Downgrade

Depending on the firm, analyst recommendations can have a significant impact on the price of an issue in the long and short term.

For example, Goldman Sachs increased price target on Twitter TWTR from 46 to 65 on Monday, a change that instigated nearly a three point higher open for the volatile issue.

A downgrade by Brian Sozzi of Belus Capital Advisors of Starbucks SBUX from Buy to Hold is certainly worth taking a closer look at. (link to: http://www.benzinga.com/analyst-ratings/analyst-color/14/01/4217625/belus-capital-advisors-brian-sozzi-reveals-concerns-on-s)

Mr Sozzi, who was right on with his assessment of JC Penney in 2013, is adding to his winning ways in 2014. Before Sears SHLD issued its dire outlook for 2014, Sozzi published a negative report on the issue. Complete with revealing pictures of the sad state of affairs at several store locations. (Link to: http://www.benzinga.com/analyst-ratings/analyst-color/14/01/4203207/brian-sozzi-retailers-just-letting-the-stores-die-everyd)

In Monday’s report, Mr. Sozzi cited several reasons for his downgrade of Starbucks. At the top of the list was the conclusion that newfound challenges in its US business may hinder the company for reaffirming its FY2014 EPS guidance when it releases first quarter earnings on January 24.

In his view, it may trigger selling by investors that surmise it is a growth stock, that may slow or stop growing in the upcoming year. If that perception comes to fruition, the issue may be subject to profit-taking. That coupled with aggressive short sellers may be the recipe for a steep decline.

From a technical perspective, the issue is retreating from its all time high made on November 5 (82.50). At this time, on the heels of the Sozzi downgrade, Starbucks shares are bearing on a major support level.at 75.81.

That level represents a double bottom from from December 16 and 17 and coincides with two other lows around 76 from the preceding two tradings sessions. Also, that level is the lowest Starbucks has traded since making its all time high and may be a place where many protective sell stops are located..

If that level does not stem the decline, Starbucks may easily decline over another two points. At that point, the issue will be revisiting the major support from its September 11 and October 9 lows near 74.50. From there, there may be no support in the issue until the September 6 low (70.93).

One downgrade by a respected analyst may not signal an end to a major rally from its December 2008 low (7.93) to its recent high. However, if investors had heeded the warnings of Mr. Sozzi on JC Penney in 2013, and more recently Sears, they may have been able to avoid the devastating declines in both of the issues.

Finally, Mr. Sozzi actions on the issue, lowering the price target from 90 to 75, still enables investors to exit the issue above his target price. And any trader or investors is well aware is much easier to exit an issue when its on a strong rally or a slow decline. Since the chart of Starbucks certainly represents a slow decline, investors may be advised to evaluate their position in Starbucks ahead of its January 24 earnings announcement.