As we have pointed out before, this week’s volatility is due to a combination of factors from profit-taking to inflation expectations.
The back and forth will likely continue for a bit longer, but we don’t see any issues that would represent any real risks to the long-term trend.
Therefore, we recommend increasing our exposure to consumer stocks a little more with a new trade in Constellation Brands (NYSE:STZ).
We expected some potential for a consolidation and maybe a short retracement. However, now that the Molson Coors (NYSE:TAP) earnings announcement has been released, the sector looks likely to move higher, and STZ appears undervalued.
The growth in the seltzer business is going to attract competitors (even Coca-Cola (NYSE:KO) is getting into the game), but our estimates show STZ’s market share as defensible in that area, and the product should continue to drive growth.
This is also a play in favor of normalizing consumer behavior as the vaccine campaign continues. STZ’s “on premises” business (sales to bars and restaurants) should continue to grow this summer and is not fully priced into the stock’s value.
From a technical perspective, STZ is just creeping beyond resistance but has lagged some of its less fundamentally sound peers like TAP.
We feel this makes STZ undervalued on a relative basis, but we still want to be cautious.
Therefore, we recommend selling a new put write on the stock, which gives us more flexibility if there is some short-term volatility.
We like a strike price that lines up with the middle of the gap the stock formed in early April, and we prefer an expiration date in early June to give the trade some time to play out.
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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