Don’t Chase Constellation Brands (STZ)

by Serge Berger | July 3, 2014 7:48 am

Yesterday before the start of trading, Constellation Brands (STZ[1]), a large producer of alcoholic beverages, reported better-than-expected results for its first quarter. Although STZ stock rallied on the day and broke past technical resistance, it closed the day well off the intraday highs, thus flashing warning signs of buyer’s exhaustion.

stock picking advice beat the bell[2]More specifically, Constellation Brands earnings for Q1 came to $1.03 per share, and adjusted earnings of $1.07 easily beat analyst estimates of 93 cents. Meanwhile, revenues of $1.53 billion rocked by more than 130% thanks to the 2013 acquisition of Crown Imports Beer, and that figure trumped estimates of $1.23 billion. Operating margins improved about 1 percentage point to 26.5%.

In terms of the outlook, Constellation Brands raised its full-year 2015 earnings guidance from a previous range of $3.95 to $4.15 per share to a range of $4.10 to $4.25.

Consumer staples stocks, to which STZ belongs, have had a good run year-to-date, particularly if measured off the February lows. As U.S. economic growth decelerated this year, the typically defensive consumer staples sector took this chance to shine and push to new all-time highs.

STZ Stock Charts

Looking at the multiyear chart of STZ stock, note the sharp rally since June 2012, when shares gapped higher; they haven’t looked back since. In total, from June 2012 up to yesterday’s intraday highs, STZ rallied about 320% in an orderly fashion — but also, through the longer-term lens, this looks to be an unsustainably steep slope.

To put the rate of incline in context, note that STZ stock hasn’t touched its 200-day simple moving average (red line) since early 2013. With Wednesday’s post-earnings rally, Constellation Brands also just about retested the upper end of the steep channel (black parallels), which through a technical lens could offer investors a good area to take profits.

From a fundamental perspective, it makes sense that STZ stock would rally sharply after the Crown Imports acquisition, but at some point the increased sales would be baked into the stock price, at least for a while.

Judging from the long-term chart, this moment may have arrived.

Constellation brands stz stock charts weekly
Click to Enlarge

On the daily chart, note that STZ stock broke past lateral resistance in mid-June, which in and of itself is bullish. However, Wednesday’s intraday action is concerning, particularly if we also consider the aforementioned points on the multiyear chart above.

Near the open on Wednesday, STZ was up around 7% for the day, but the stock quickly reversed, rejecting these new all-time highs and closing the day up “just” 2.34%. Many momentum indicators including the Stochastics are showing negative divergence, which points to losing upside momentum in the stock.

constellation brands stz stock charts daily
Click to Enlarge

Investors can use Wednesday’s post-earnings rally to lock in some gains, while quicker traders could try shorting the stock against Wednesday’s intraday highs near $94.75 for a mean-reversion move back toward the low $80s.

Like what you see? Sign up for our daily Beat the Bell[3] e-letter and get investment advice delivered to your inbox every morning!

Download Serge’s trading plan in the Essence of Swing Trading e-book here[4]. As of this writing, he did not hold a position in any of the aforementioned securities.

  1. STZ: /stock-quotes/STZ-stock-quote/
  2. [Image]:
  3. Beat the Bell:
  4. Essence of Swing Trading e-book here:

Source URL:
Short URL: