Tap Into This Buying Opportunity

Molson Coors Brewing Co. took a tumble after reporting fourth-quarter earnings that were not well received on the street. Results for 2018 came in with adjusted EPS of $5.04, a new record, but management guided to slightly lower, to $4.90, for 2019. Down years are never seen as a wonderful result. In TAP's case the already completed stock price decline from a 2016 peak of $112.10 to a Feb. 13, 2019, quote of $58.46 seems to have more than discounted that news. TAP now sells for about 11.9x its already reduced forward estimate while yielding 2.81%. Both numbers compare favorably with the stock's 2010 - 2018 average P/E of 16.4x and typical yield of 2.32%. Molson Coors hasn't been available at this low a multiple since early in 2010, when it was about to surge from $38.40 to $51.10 over the next 10-months. TAP's two most recent should have sold moments (red-starred below) only kicked in when the shares fetched ridiculously pricey valuations along with historically sub-par yields. A simple regression-to-the-mean valuation, based on year ahead profits suggests a 12-month target price north of $80 would be quite achievable. That modest goal would provide total return of around 40%. That very tempting return project is not pie in the sky. TAP topped out between $77 and $112 during each of the five years 2014 through 2018. I'm not the only one seeing value here. Independent research from Morningstar labels TAP as a 4-star, out of 5, buy. Morningstar's estimate of Molson Coors' present day fair value now sits at $78, down from $80 prior to this week's earning report. Here are the actual bid/ask spreads and last trades for TAP's Jan. 15, 2021 expiration date options when the shares were quoted at $58.46. Risk-averse traders who like TAP could set up this very conservative buy/write combination. The example uses just a 100-share lot along with 1 covered call and 1 naked put. It could be scaled up to any round multiple of 100 if a larger dollar trade is desired. This illustration used the $60 strike for both the call and put sales. On expiration day only two possibilities exist. TAP will close at either be $60 or higher, or below $60. The first instance requires just a 2.7% increase from the trade inception price. That's all it would take to produce the best-case scenario detailed below. Wow! That small rise, or anything better, would translate into a 24.3% annualized gain for the 702-day duration of the trade. Income investors would kill for returns like that. Outright buyers of TAP at $58.46 would have needed to see it rise to about $81.84 to have achieved similar total returns over the same time period. They would not have been graced with any margin of safety had TAP declined, or just held steady, rather than gained. There's no guarantee that TAP will rise. If it closes below $60 on expiration day you'd see the following events play out. This worst-case scenario doesn't really appear all that scary. TAP could fall by almost 15% without causing a loss. Any drop of less than $8.57 per share would allow for at least a small profit. Refer back to the 2010 - 2019 data in the chart shown earlier. You'll notice that TAP hasn't changed hands for as low as the buy/write's sub-$50 break-even price since 2013. Molson Coors is cheap enough and healthy enough to be a good stock to own. The buy/write strategy, or simply shorting puts would be alternative ways to take a bullish stance on this company. Buy some TAP shares, sell some puts, or consider setting up the entire buy/write combination.

Tap Into This Buying Opportunity

Molson Coors is now cheap enough and healthy enough to be a good stock to own.

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