Bulls target beer giant heading into summer
05/16/17

A major brewer has broken out to new highs, and the bulls seem to be raising their glasses in salute.

Constellation Brands (NYSE: STZ) has made new record highs every year since 2013, when it acquired rights to Mexico’s Corona and Modelo. The animal spirits came back last month when results crushed estimates and management raised guidance. Yesterday traders mixed up a cocktail of options, looking for the rally to continue through the beer-friendly summer season:

  • They guzzled 6,000 October 185 calls for $8. That gives them the right to purchase STZ shares for $185 over the next five months – no matter how high they may be at the time.
  • They sold 6,000 October 200 calls for $3.30. That forces them to fork over stock for $200 if it’s above that level. But they would have already bought for $185, so it would still be $15 profit.
  • They sold 6,000 October 165 puts for $4.70. Here’s the real risk because they have to buy STZ for $165 if it goes under that level… Above it, and they’re golden. Below it, they face major losses.
  • It cost nothing upfront aside from commissions because the premiums cancel each other out. (They paid $8, but collected $4.70 and $3.30.)
  • Maximum profit will occur if STZ closes at $200 or higher on expiration. Considering that contract controls 100 shares, the maximum profit would be $9 million ($15 X 6,000 contacts X 100 shares each). 
  • Breakeven occurs anywhere above $165, with an increasingly painful hangover below. To be precise, they’ll lose an additional $600,000 every $1 STZ goes under $165.
Constellation Brands (STZ) 6-month chart

Source: OptionsHouse by E*TRADE

Chart watchers may be fixated on that $165 level because it was almost exactly where the stock peaked in March. So it could now be viewed as support.

STZ rose 0.96 percent to $180.28 yesterday. While most of the long-term run has been credited to Corona and Modelo, analysts now see the potential for further gains from its more recent purchase of Ballast Point as a premium label. (After all, the deal's been fermenting more than a year.) They’re also licking their chops for margin expansion in the company’s wine business.1

Monday’s complex strategy also provides exposure to not one, but two quarterly reports… late June and another in early October. It accounted for almost all the options activity in the name and pushed total volume to more than 20 times the daily average in the last month.

Bottom line: STZ has been on a rampage for years, and at least one big investor thinks it will keep running.

 

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1. Bank of America Merrill Lynch: Solid outlooks; raising estimates and PO to $190. 4/6/17. Credit Suisse: Liquid Gold Keeps Pouring but Inflation Point Has Arrived. 4/6/17.