Earnings Preview: Playing the Long Game with Constellation Brands Stock

Many investors were hoping to see stars after Constellation Brands, Inc. (NYSE:STZ) dropped $4 billion into Canopy Growth Corporation (NYSE:CGC). They’ll have to wait a bit longer. Constellation enters the earnings confessional next week, and the post Canopy buzz for STZ stock may get a bit harsh before it gets better.

CGC stock has been nothing short of spectacular since mid-August, rallying more than 100%. STZ stock, however, has languished. Constellation initially faced a bit of a backlash for it’s $4 billion outlay on Canopy. After all, Constellation didn’t buy Canopy outright, it just has a majority stake in the company (if all warrants are exercised, that is).

The initial backlash from STZ investors was severe. Roughly $2.5 billion was wiped from Constellation’s market capitalization following the news as investors worried that the company overpaid. This is the current perception among many STZ investors, and a considerable underlying current in the stock’s sentiment backdrop.

As such, next week’s earnings report will come under heavy scrutiny — warranted or not. Wall Street is expecting Constellation to earn $2.60 per share, up from $2.47 per share a year ago. Revenue is seen rising 8% to $2.25 billion.

In the past four quarters, Constellation has bested expectations three times and missed only once (in the most recent quarter). Still, EarningsWhispers.com puts the whisper number at $2.61 per share — a figure that could be in jeopardy with Constellations’ investment in Canopy Growth.

Guidance will face the heaviest scrutiny, however. Investors will look for any sign of weakness to justify their recent selloff of STZ stock … and likely blame it on overpaying for Canopy.

The problem is that these views are very short sighted. Medical marijuana is now legal or decriminalized in roughly 50 countries and 31 U.S. states. And recreational marijuana is quickly following suit.

Analysts at Benchmark recently projected that the global cannabis would hit $200 billion over the next 15 years.  What’s more, Canopy Growth is positioned to take full advantage of that massive market, and is likely among the best cannabis plays on the market.

That’s the long view, and Constellation is smart to get in on this market early.

STZ Stock
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 The short view, however, has STZ stock wading through considerable morass before it realizes any of these potential gains. With guidance concerns and current-quarter expectations set a bit high, STZ stock is not positioned well at all.

Specifically, the shares are still trading in bear-market territory. STZ has been unable to reclaim its 200-day trendline despite several attempts in the past month. The shares are now pinned between this long-term moving average and their shorter-term 50-day trendline, which lies near $211.

Turning to STZ’s options pits, we find that speculators are pricing in a potential post-earnings move of about 5.5%. This places the upper bound at about $226 and the lower bound at $202.

2 Trades for STZ Stock

Put Sell: Constellation Brands has considerable growth potential down the road due to its investment in Canopy Growth. However, the stock is likely to decline sharply after earnings, potentially offering an excellent entry point for those looking to own the shares.  In this situation, those looking to own the stock at a discount to today’s prices could enter an October $205 put sell position and get paid to wait for the stock to come to you.

At last check, this put was bid at $2.29, or $229 per contract.  You will keep this premium as long as STZ stock closes above $205 when October options expire, but that’s not our goal here. We’re looking to own STZ stock at $205. If the shares do not fall below $205 at expiration, just roll the strike out (and potentially up) into November and continue as planned.

Remember, you need enough capital to buy 100 shares of STZ stock for every sold put you are assigned.

Bear Put Spread: For short-term profits on a decline, an October $205/$210 bear put spread has considerable potential. At last check, this spread was offered at $1.21, or $121 per pair of contracts. Breakeven lies at $208.79, while a maximum profit of $3.79, or $379 per pair of contracts is possible if STZ stock closes at or below $205 when October options expire.

As of this writing, Joseph Hargett was long Canopy Growth Corporation (CGC) stock.

Article printed from InvestorPlace Media, https://investorplace.com/2018/09/earnings-preview-playing-the-long-game-with-constellation-brands-stock/.

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