We are still expecting a little more back-and-forth trading this week based on the flow of capital moving out of the riskiest asset categories and into more stable opportunities.
One of the ways we can take advantage of that is by opening a new position in something that is being oversold as investors react to news.
We like Constellation Brands (NYSE:STZ) following their earnings report last week. The company beat estimates for both revenues and earnings, but the bottom-line numbers were a little lower than last year, which was likely why the stock dropped to support last week.
We feel that once investors realize the “on-premises” sales for the first quarter this year should be lower, considering bars and restaurants closing during the pandemic, the price will reverse higher.
Constellation offers strong growth fundamentals in the beer, wine and spirits category, where we think their growth potential is understated.
For example, although STZ is most well-known (and “loved” according to consumer surveys) for its Corona and Modelo brands, its growth potential is in high-end beverages and seltzers that are just starting to gather more traction and can leverage the established brands for growth.
Additionally, we think STZ’s position in the cannabis market is especially undervalued. The difference between STZ’s opportunities with Canopy Growth versus other cannabis companies is that STZ has established brands, distribution and marketing channels.
Most of STZ’s current exposure to that business is in Canada, where legitimate Cannabis transactions are expected to rise from the mid-30% range to 80% or more in the next two years. We believe investors have not fully priced in that same opportunity in the U.S. a few years down the road.
From a technical perspective, STZ is just bouncing up off support near $220 per share.
To take advantage of this, we recommend selling to open a put-write on the stock.
We suggest using a strike price that lines up with the $220 support level and an early May expiration that will provide a solid amount of option premium.
On the date of publication, John Jagerson & Wade Hansen did not hold (either directly or indirectly) any positions in the securities mentioned in this article.
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