Mini brew-at-home impresario Keurig Green Mountain (GMCR) is readying for earnings next week. And with technicals so “Kold,” a very nice bottom could be brewing in shares — one made more palatable as a position with a bullish trading strategy.
It’s still a week out, but already option premiums are percolating as traders ready for another volatile earnings reaction in GMCR stock. In front of the report, analysts are forecasting a 20% dip in profits on earnings of 79 cents per share.
In the last two reports GMCR has missed bottom-line views by a very modest 1.9% and 1.12%. Prior to those misses, the company had delivered earnings beats for 10 or more consecutive quarters.
Revenues for the trailing 12- and 24-month periods have increased, but GMCR — a name not so long ago synonymous with growth — is definitely in need of some caffeinated earnings fuel. One potential source, though off to a lukewarm start at best, is Keurig’s Kold, a cold-beverage machine.
This past week a Goldman Sachs analyst weighed in on the Kold product and other metrics in defending shares, the firm’s “buy” rating on GMCR stock and setting its reduced (but still 66% premium) price target of $120.
GMCR Weekly Chart
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The good news is that shares of GMCR stock now look to be brewing a playable bottom. What’s appealing is the modest breach/testing of its 62% Fibonacci level constructed from a cycle low in the summer of 2012 that has held for the last three plus weeks.
Another plus: Lighter volume as GMCR stock continued to make new lows following three heavy weeks of dumping in May. And an oversold stochastics position is promising at this time.
Lastly, Keurig’s deep corrective setback amounts to a decline of around 53%. That’s a bit higher than the typical 20% to 30% associated with growth stocks during their normal course of base building. However, GMCR stock isn’t exactly the growth name it was not so long ago. Maybe it will be again someday.
But at this point, deeper value associated with a larger correction like this one becomes more appealing in playing a potential bottom than if shares were simply down 20% to 30%.
If shares of GMCR do percolate higher, I’d estimate a range of $77 to $83 is certainly possible given its earnings history. The 8% spread in price on top of an anticipated minimum move of 10% from $72 is a bit wide, but GMCR is notoriously volatile so it’s viewed as appropriate.
On the chance of lower prices in GMCR, if the 62% retracement level fails to hold, that’s considered significant and bullish value bets are off the table. At that point, a complete 100% move back to the 2012 low of $17.11 could be the eventual end game for bears.
GMCR Options
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Using the regular August contract with 25 calendar days remaining, option traders are pricing in a 68% chance that Keurig’s earnings reaction will be contained to a volatile $11 from the current share price near $72 in GMCR stock. This establishes a range through August expiration of $61 to $83 as shares are priced to move up or down by as much as 15% over this period.
Given the estimates set by fellow option traders and GMCR having made good on dramatic moves in the past, the Aug $72.50/$75 bull call spread for $1, or a “single,” is served up right, in our professional opinion.
The spread takes advantage of high implieds by reducing volatility risk with the sold Aug $75 call contract. And if shares of GMCR are above $75 at expiration, the $1.50 profit amounts to a return of 150%, with the stock only needing to move higher by about 4.5% — less than a third of the predicted upside threshold.
This tight August vertical leaves plenty of room for a more modest gain in GMCR, and the trader is still able to max out the spread’s return potential. That’s a plus for sure.
Also, losing a “single serving” on an earnings play if shares don’t cooperate technically is definitely a good way to ensure traders keep their losses small without relying on luck.
Note: I’m a Folgers-by-the-gallon consumer and if I get this one wrong, we did provide a spot-on technical assessment and option strategy in front of May’s very bearish earnings outcome.
Investment accounts under Christopher Tyler’s management do not currently own positions in any of the securities or their derivatives mentioned in this article. The information offered is based upon Christopher Tyler’s observations and strictly intended for educational purposes only; the use of which is the responsibility of the individual. For additional market insights and related musings, follow Chris on Twitter @Options_CAT.
