A Company’s Misstep Can Lead You to Profits

Starbucks (SBUX) CEO Howard Schultz recently announced that the company would start offering energy drinks in its stores. He also mentioned that Starbucks would be getting into the “health and wellness business.” Yep, you read that correctly. A coffee chain wants to break into the health business.

For a company known as a purveyor of fine (if not overpriced) coffee, this is a huge step outside their core competency. And, in my opinion, it’s a big mistake. With the company stock price down 50 percent in the last 16 months, now is not the time to be breaking into unfamiliar markets. For one thing, branching out costs money. For another, Starbucks risks losing brand identity as it expands its product line away from coffee.

The company is already facing shrinking margins due to increased costs of sales (up 1.1 percent versus last year) and increased operating expenses (up .90 percent). It is closing 100 under-performing stores, and reducing the number of store openings this year. Taking on the additional costs to expand into another market just doesn’t seem like a wise decision. Not to mention that the expansion would be into the highly fragmented energy drink market.

Investing in Starbucks Stock
With Starbucks’ stock already down dramatically from its peak, it may appear that the opportunity to profit from these missteps is past. But I believe there is still more room for the stock to fall. And I don’t think the slide will stop until the share price is in the single digits. So taking a short position against the coffee king can add some diversity to your portfolio… and be a profit opportunity in a falling market.

Meanwhile, if you hold Starbucks stock, it might be time to dump it.

[Ed. Note: Rick Pendergraft is a professional trader and market analyst. In Rick’s new investment service, he gives easy-to-follow, step-by-step advice that you can use to create a consistent, automated income. Learn more about how he can help you produce explosive gains – no matter which way the market is trading – here.]