The Day After
It's been more than 24 hours since the ball dropped. Constellation Brands (STZ) had reported, and the numbers were generally good, driven by strong depletion portfolio performance that in turn had been driven foremost by the firm's beer lines. (Modelo and Corona) Markets quickly took notice of improved margins as well. An increase in the dividend? Oh, yeah. The stock took off on the news. That fiscal fourth quarter (2019) came on top of the already positive headlines that the firm had sold roughly 30 lower end wine brands to E & J Gallo Winery for a cool $1.7 billion. Constellation had indeed been looking to offload this lower priced business and this was perfect timing. The stock moved higher... $190, $191, even $192. Could Constellation hold it's ground? What could go wrong?
On That Note
Friday morning, Deutsche Bank cut STZ to a "Hold" rating from a "Buy", which completely makes sense given that Deutsche already had a $194 price target on this stock and they did not change target. The shares wiggled a little in overnight trade. The they caught a bid. Stable. Up here. The CEO, Bill Newlands spoke on Canopy Growth (CGC) . Mentioning Canopy's leadership position in Canadian cannabis markets, as well as the potential for beverages and edibles, Newlands thinks CGC could possibly produce revenue of $1 billion for the fiscal year. Oh, by the way, Constellation, for those who've forgotten, holds a 38% stake in Canopy Growth. Hmm. Thursday's gains have at least so far, held into Friday.
The Chart
As I explained to Katherine Ross of TheStreet in the video that we filmed together, I see the not yet completed formation of a cup. No handle yet. If we see one, it probably shows up around $201. If. The name has yet to truly conquer $191 resistance. Failure at pivot could produce a slide all the way back to $181, but the name is not acting like that, at least not right now. The average price target that I see across the industry for this name is close to $210.
So... How Do We Trade STZ, Sarge?
I thought that you'd never ask. There are several ways to skin a potato, so let's get down to it.
What If You...
1) Came in long, and need some protection...
- Purchase May 17th $190 puts (value: $4.85)
- Sell May 17th $180 puts (value: $1.70)
Net debit: $3.05... Hey, you're up $10 in 24 hours. Piece of mind. You may have to buy the shares back at $180... still a nice trade for capital extraction.
2) Bought the shares up here...
- Sell July 19th $210 calls (value: $2.65)
- Sell July 19th $185 puts (value: $6.55)
Net credit: $9.20... Poof. Like magic, your net basis is now below $181, our supposed support level. The catch? You may have to pay $185 for the shares in July. Even then, if the lots are even in size, the trader will run with a net basis of around $183.
3) Risk averse, but still want to play...
- Purchase July 19th $190 calls (value: $10.10)
- Sell July 19th $210 calls (value: $2.65)
- Sell July 19th $180 puts (value: $4.75)
Net debit: $2.70 .. Now, even one contract at a time, you're playing the upside through a bull call spread, subsidized by adding equity risk at a discount three months down the road. or... you could lay out $190 a share for an equity stake.
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