Dutch Bros chart analysis #BROS

I was recently reviewing the 100 charts of great stocks in the Bill O’Neil book and realized how many of them were related to consumers (HD, Price co, Costco, Walmart, Americal Online, Dell, Yahoo, Schwab, Ebay, Deckers, Apple, Google, Priceline. Also food, think McDonalds, Coke, Hanson Natural (Monster). Surprisingly not in the list: Starbux, Chipotle, Cracker Barrel (Peter Lynch).

So I started looking through my list of IPOs I am watching and came across two of interest, Dutch Bros and CAVA. I will present Dutch Bros today.

Long-term potential: I have no illusions this will be the “next Starbucks” They specialize in drive-through high-energy coffee drinks, which is a much smaller market. SBUX market cap = $103B. Bros Market Cap = $5.6B. If BROS can become 1/10th of SBUX you are a double to $10B.
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The chart below is a daily chart. It had formed a cup with handle base that is 47 weeks long and reached a depth of 35% (off the high on the left of the base). 35% is about the max acceptable unless there is a coinciding market sell off. In my opinion, the handle is flawed as it went almost down to the bottom of the cup, though its buy point is properly above the 50% point of the base. I prefer to look at the handle as a base in and of itself and will address it that way.

Around Jan, 2024, we see a heavy volume (red bar) sell off just as this base is starting down the left side. We like that as it gets rid of weak holders (so that can’t sell later and mess us up), but we prefer to se that near the bottom of the base.

We really want to see institutional accumulation as the right side of the base builds, and we see a good amount of that. The tall blue bars show much higher than average daily volume on up days (I highlighted in green boxes). A few days before the breakout into the blue-box buy area, a little flag was form on low volume. They were down days, but very small prices changes, so no real selling. Then, the day before the breakout we see a big volume up day (73% higher than average vol). On the breakout day it was 107% higher volume. The price really surged and was near the top of the 5% safe-buy range, so you had to be watching in the morning. The day before could have justifiably been used as an early entry coming off that little flag. It did have power move above the 50dma, early, but it probably was not good enough to make me nibble had I been watching.
I did not buy until today, where you see that green line. I also started with a smaller amount than usual, as I will explain.

So, after the strong first day breakout, it consolidated in a high flag and soon broke out of that. If you had bought a full position early in the breakout, you might justify adding 10% here (but you don’t ever want to overwhelm your cost basis). Unfortunately that day after that there was a VERY big volume sell-off, I did not try to see why. However, the fall did not take the stock below the 21dma, much less the buy point. It continued to edge downward and then had a little bounce off the 21dma. So today, when looking through my IPO list for possible high-potential stocks, I found this. The big sell off day makes me want to start small, in case that is a sign of failure coming.

Moving average lines are “proper”, the green 21dma is above the red 50dma, which is above the black 200dma.

Next, the weekly chart…
Clearly this is a new IPO and it started hot in late 2021 and got slaughtered by increasing interest rates. This is good for me as it gave the stock a chance to prove earnings without skyrocketing out of a buy range.

It looks like it has bottomed in late 2023 (as part of this cup/handle base). You can see the tall blue (weekly) up bars that formed before the breakout, very positive action. That green line with the tic-marks represents EPS growth rates. When going up, EPS is increasing. You can see it just flattened a bit, which is a yellow flag that EPS growth rates might be slowing (but we need more data).

The RS is 69, which is not nearly as good as I would like. It was a little higher on breakout day, but not super-strong.

Here are some growth numbers…
EPS and Sales were great in 2023, but estimates for 2024 are lower. Sales will still be good, but EPS will have meager growth. That is a worry unless they start beating.

The number of funds owning the stock is low, but that means there is lots of room for growth in that number. Those are the guys that make the stock go up or down, not me and you.

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So, what do you think. Do you analyze this differently? Would you buy now?

Pete

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Okay, so let me give BROS a run, it has some data to work with. Let me also give a disclaimer that you stated you were looking at more longer term and while I do have longer-term portfolio, I am more focused on shorter term verticals (typically 45 DTE that are sold anywhere from 7-30 days in). Therefore, my perspective always leans shorter term. As well as I do look at basic fundamentals, mainly those similar to CANSLIM.

While my first glance is usually a 6 month candlestick in Stockcharts, let me show a 3 year daily with some fundamentals, yes I use this chart as a screener.

I put this chart up as I use it to glance at earnings, which CANSLIM emphasizes. They kinda suck. Yes, it’s technically beat it’s earnings everytime, but there’s only small earnings growth overall. Do note-NEXT EARNINGS are in 8 days.

Looking at a standard simple daily 6 month chart, there is nothing exciting about this chart. PPO, RSI and price are in synch and ema’s concurring in sequential layering up. Of note, volume is slightly increased.

Pulling it out to two years get’s more interesting.

There’s actually a reasonable down channel with a recent potential breakout or false breakout. The potential false breakout turn down started a few days ago but still could be related to the overall market turn, especially today. Note (graph not attached) the 3 yr weekly chart shows a similar channel with potential breakout.

Looking at the stock in more profile, it’s notable that it has some general accumulation (in association with the modest increase in volume) despite the Industry Group (US Restaurant & Bar) having weak strength relative to the SPY. In addition, there was an increase in the relative strength compared to Group and SPY up until the last few days. I posted it compared to SBUX out of curiosity and shows a strong increase relative to SBUX, flattening in the last couple days.

So, overall, interesting as it is changing character but not enough to make me want to take a bite but I will stick it on a level 1 watchlist to see if it changes. There’s too many other candidates out there to focus on just a few hoping they will break, but it’s worth watching for confirmation and direction. It’s always hard to to judge when the whole market is having a hiccup how much of the downturn is individual or group, but that is a very large bearish belt-hold Marabozu candlestick from today and I would want a true reversal candle before I put money down.

It’s interesting but not definitive from my perspective. I’m actually a little surprised that it popped up on your CANSLIM radar. I’m curious what others think.

Lakedog

PS Gave my SIL some cash to try his hands at stocks in 2022, he bought some BROS. I did also, but played short term moves and then got totally out with a little green. He’s still sitting on it. I’ll have to show him the charts, although, think he has lost interest after his initial dipping his toe in the water.

For the sake of discussion, since this ticker was brought up for discussion:

Followup on BROS shows a couple interesting details, just FYI.

Glanced back at BROS and noticed a piercing candle, bullish. It opened below the prior candle and closed greater than 50% of the body. It suggests that there is a change in momentum and that it may go higher. Like all candlesticks, it is NOT absolute, but suggests. Again, just as a comment and not a prediction, but should it gap up and close higher tomorrow, then that is a bullish pattern of an island cluster reversal. Just pointing out a couple TA details and am curious how it will play out. Regardless, wouldn’t expect much more than an increase to areas of resistance and support at just over 34 or just over 35.

As an added point, I previously mentioned the weekly chart showed that it had broken a down channel similar to the daily. It closed this last week with a wick hitting resistance. Bounce off of support? Time will tell.

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Am I personally buying BROS? Nope, not at this point, the potential TA targets are too shallow for the effort.

Happy hunting,
Lakedog

PS Trying to generate a little activity here. Would sincerely love to hear any other comments or thoughts or have other charts brought up if there is any interest.

Beating a bit of a dead horse…

Gap closure without a gap up so no island cluster. A bearish engulfing candle. However, candles and their strength need to be be interpreted in their setting. While this is technically with stacked EMA’s and could be called an uptrend, which is where bearish engulfing candles occur, the strength of the signal in a pullback is soft.

Anybody got an interesting stock to discuss?

Lakedog

I don’t disagree. I mostly prefer stocks with a good uptrend, but I am also becoming a little biased to restaurant chains and their potentials. BROS had a bad period of over expansion, but they have corrected that. It also looks like this base is part of a bottoming process (the base just before it did not blast off) The EPS growth is expected to be low, so that is a big yellow flag, but sales growth is pretty strong as are the overall IBD rankings.

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I like the upward inflection in EPS as shown in the previous weekly chart, that often happens before a stock takes off.

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Puddin have you looked at SMCI using Marketsurge? What did you think of it?

Andy

Pudding,

Brave of you to make a pitch for BROS. Let me take the opposite tact and rate it AVOID on purely technical grounds grounds.

Here is a 1-year, weekly chart scaled in percentage with RSP (the green line) used as a benchmark.

Yeah, BROS offered some possible trading gains, though not as much as simply owing the broad market, and not even as much gain --on a B&H basis-- as just buying a T-bill. So, to buy it now --if ever-- is to make a bet that --somehow-- the company will perform better in the future.

How likely is that? I’d argue not likely at all, given current geo-political events and the distressed state of the US economy. In other words, to buy BROS is to make a highly speculative, scantily evidenced bet instead of a sound, Ben Graham-style investment.

Charlie

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For fun, BROS for the year of 2023 as a Swing Trader would have had 10 out of 11 successful trades. Lost money on 9/8/23, Howver recoupted the lost money. For 2024 had one successful trade for 34 and change percent profit.


Quill -

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Arindam, following IBD rules, I look at longer term possibilities for stocks with strong fundamentals, growing institutional support, and a proper base. Yes, this stock has sucked in the past, but like many hyped IPOs, it has had to reevaluate its approach. Cramer had excoriated it for expanding too fast and they seemed to hear him and the market. They have cut back on “growth and any cost” and are focusing on profitability. That allowed me to be willing to be a small position in the buy zone after the initial big move above the pivot point on volume 75% above its moving avg. The RS was only 69 and that made me cautious. Also, Bill (founder of IBD) really puts an emphasis on stocks near new highs, and this is clear a bottoming base at best.

With the market getting worse and worse, I have been paring back my IBD trading positions, many at very good profits. This was one of my most recently buys and as such, was one of the first to go, but only at a small loss.

I will continue to monitor this and certain other new restaurant stocks as they can have fantastic growth potential as they become fads or even big chains (SBUX, CMG, etc) through nationwide expansion.

Pete

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Pete,

I’ve got a lot of admiration for O’Neil and his methods. I own his books, have attended IBD seminars, and used to subscribe to their print edition newspaper. But I don’t trust the momentum method of investing enough to put serious money to work using it, and especially not since 2008 when the Fed went all in funding and back-stopping Wall Street’s --and our dear gov’ts-- financial malfeasance.

My preference is Ben Graham-style value investing which I applied to bonds for a lot of years, investing across the yield-curve and up and down the credit spectrum, and made good money. Hence, I want to see immediate evidence that a potential investment is an obviously over-sold bargain and not being bought just for its narrative. Hence, if a stock like BROS doesn’t have a compelling chart, I don’t dig into its financials and rate it AVOID. But as in fishing, to each, his own.

Charlie

@Arindam 2008 was the perfect example of how CANCLIM works, the sell rules kicked in early and kept you in cash during the crash. IBD called a “Follow-thru-day” on 3/11/2009, 2 days after I called a capitulation bottom and moved my 401k back into the market. You would have been kept out of the tech crash as well. Before the crash of 1987, the market was down 10% the week before, but I don’t know if they had called a correction before the close on Friday and the dreadful open on Monday.

I would say is it “momentum-related” because they say the market direction determines 75% of the return of a stock, so don’t go buying stocks when the market is in a correction. It is momentum in the sense that you look for stocks that have institutional accumulation, a good RS and are breaking out of a proper base on high volume (more institutional support).

Ok, MarketSurge lets you go back in time pretty far, so he is the crash of 87…Well before the crash, the S&P dropped below the 50dma for a while, came back above and then on 10/6/87, sliced below it again. It continued falling before plummeting below the 200dma on 10/16, the Friday before black Monday (market with my red arrow). I can guaranty you IBD would have had you out well before that Monday no doubt before the Friday. (I remember that well, as a young investor 3 years out of college, I was really proud of myself for buying into fear on the big dip on Friday. Monday I was in the DC area for a 2-week training class and had not access to the media when in class. When I got back to the hotel room, my phone was ringing. It was my future wife and she asked if I was sitting down. Me: ha, ha, why. Well just turn on the TV. Me: oh, well holy sh1t!. ) So CANCLIM/IBD rules would have saved me lots of money and got me back in at a good time.

Don’t get me wrong, lots of systems have sell rules, and anyone just using the 50 or 200dma religiously would be out. I am not trying to proselytize IBD here and I have a small percent of my investing money in my dedicated IBD account. This is just the system I have followed for many years, dabbled with a number of times, and finally have time to try seriously since I am retired. If I just didn’t spend my entire morning in Hot Yoga every day, I could really jump into some breakouts early. This trading will never make or break me.

Sorry for babbling on.

Pete

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Pete,

Much thanks for your explanation of why you trust IBD’s stock picks and buy/sell signals. I don’t for preferring to bet on mean-reversion rather than momentum.

Yeah, the March '08 reversal was something else. Totally artificial, but totally tradable. The Plunge Protection Team should NOT have stepped in. Their doing so just created present-day problems, like $35 trillion in debt and accelerating fast with inflation running 15% -20% not the BLS’s reported low-ball, never mind the continued gutting of the US industrial base in favor of increasing financialization.

Yeah, yeah, The macro stuff’s is a whole 'nother rant. But the house of cards that momentum investing depends on is going to crash, because the narrative is unraveling. E.g., on the basis of purchasing power parity , BRICS Plus is now larger than the G7 and will increasingly control energy supplies, never mind the end-run they are doing around the US$. Specifically, what will US stocks be worth when the Fed/Treasury cartel can no longer print?

That’s what I worry about, not whether this or that flash-in-the-pan tech company might have a brief run up. What’s the reported mean household income? How much debt are they carrying? Us oldsters are well suited to ride out the ongoing recession and coming depression. But not younger generation. So, what tools and insights do they need? Specifically, which role models will best serve them? Bill O’Neil or Ben Graham? I don’t know the answer to that. But Graham is the one I’d bet on and try to introduce to my nieces and nephews on this analogy. Buy your stocks and bonds the same way you buy your bell peppers and broccoli.

Charlie

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@Arindam As far as BROS goes, I do not disagree with you at all. Again, a lot of great long-term winners were retail and restaurants that gave people something new and then expanded across the nation. If I get back into BROS, it will have good growth numbers and breakout of a good base, and if it fails I am out.

Back to momentum and markets. As I have been reviewing the 100 charts of great stocks in chapter 1 of Bill’s book, I notice that a ton of the successful runs started after market corrections, especially big ones. That is, you are not getting in when there has been momentum in the market, you are getting in after a follow-thru-day following a correction that has destroyed momentum. Maybe it is a distinction without a difference. Also note that IBD is never going to be finding companies like GME or AMC theaters in its screen for strong fundamentals. I consider those the crazy mo-mo stocks. Here I go again…when I bought NVDA in its March 2016 breakout, it was not a momentum stock, and I still hold it. Not as a momentum stock!

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You probably already know this Puddin but Cava is looking strong in this downturn. Might be a good one to keep an eye on.

Andy

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Pete,

You’re absolutely right. It’s isn’t an either/or matter of ‘momentum’ vs ‘value’. The investing/trading situation is more nuanced than that. But there’s virtue in simplicity, even at the risk of over-simplicity. Using Ben Graham’s methods and insights is what secured market success for me. His is a common sense approach that extends to all of life, not just markets.

I think current assets prices --except energy and PMs-- are over-bought and due for a crash. But meanwhile, money needs to be put to work. So, what to do? Not so much for myself, but for some nieces and nephews who are going to have to deal with making financial decisions for themselves and who are growing up in households and school systems that have zero interest in such matters and even less expertise.

In theory, the primary function of the stock market is capital formation. But in practice, it’s just a casino where understanding things like game theory matter more than being able to do financial statement analysis. That’s the direction of my project. I want to set up some custodial accounts for my sister’s kids and sets of position-sizing and buy/sell rules that will keep them out of trouble as they try to grow their account. Quill’s done such a project with his nieces and nephews using his trading systems. I want to do my own version, as much to see if I can as anything else.

Charlie

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