Constellation Brands (NYSE:STZ) reported earnings this morning and Wall Street liked what it’s saw. The company beat on the top and bottom lines and raised guidance. The stock is rallying 4% on the headline.
The stock market in general is at all-time highs, but investors are nervous going into tomorrow’s government jobs report. There is the worry that inflation, especially wage inflation, is rising too fast and the bond yields are spiking out of control.
That situation is what started the correction back in on Feb. 2. This week, understandably, there is a general unease in the equity market, so buying stocks at these levels is a risky proposition.
But STZ stock has a technical opportunity sitting just above this morning’s levels. If the bulls can maintain a rally for another day or two, they are likely to invite momentum buyers to try and fill the gap that was created from the dip on the last earnings report back in late June.
Constellation stock has not had a good year so far — it was down 7% coming into this event while the stock markets are enjoying all-time high levels. But redemption is right around the corner.
Fundamentally, STZ sells at a 20 price-to-earnings ratio, so owning shares at a discount from here is likely to be a successful endeavor. So in today’s pair trade I sell downside risk into proven support. And with a secondary trade I buy upside hopium to capture the potential move to cover the open gap above.
For STZ there is a wrinkle. Of late, the buzz has been about the business of cannabis as a drink to replace alcoholic beverages. Consensus is fast becoming that drinking cannabis is healthier than consuming alcohol. I leave that verdict to the experts.
If the speculation is correct then by investing in CGC, STZ has hedged its bet from the Cannabis onslaught. Yes, STZ may have overpaid for its investment in cannabis, but when your business is on the line, spending money on insurance is a wise move.
Technically, STZ stock is setting up a technical pattern that resembles a bullish inverse head-and-shoulders. Once the bears break out of the neckline, buyers will overwhelm the sellers and cause a spike.
STZ Stock Trade Ideas
The Upside Hopium Bet: Buy the STZ Jan 2019 $230/$235 debit call spread for around $1.
The Potential Bank: Sell the STZ Apr 2019 $195 put and collect around $1.95 per contract.
As long as the price stays above my puts then any premium I recover from selling the calls will be profit. I am not required to hold either trades through expiration. I can close them at any time for partial gains or losses.
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Nicolas Chahine is the managing director of SellSpreads.com. As of this writing, he did not hold a position in any of the aforementioned securities. You can follow him as @racernic on twitter and stocktwits.