“Armchair Trader Series” Recommendations
- Week Beginning -
Monday, July 02, 2018

by Ian Harvey

IMPORTANT NOTE: This is a recommendation and individual members can use their own discretion as to when to enter or exit!

You may also wish to read Stock Options Made Easy Trading Philosophy

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"Trading Capital Management"



Option Trade – Hershey Co (NYSE: HSY) Puts

Tuesday, July 03, 2018

** OPTION TRADE: Buy the HSY AUG 17 2018 90.000 PUT at approximately $1.80. Place a pre-determined sell at $3.60.

Also include a protective stop loss of $0.70.

The chocolate maker, Hershey Co (NYSE: HSY) is likely to be heading for more trouble in the coming weeks. HSY has been in a downtrend since December.

Hershey received a downgrade to "underperform" from "neutral" and a price-target slash to $80 from $90 at Credit Suisse recently. The brokerage firm analyst Robert Moskow cited a lack of consumer impulse sales due increased e-commerce traffic for the negative note.

Given the competition Hershey’s now faces, the stock could fall well below the $80 per share price target.

To be sure, the impulse buys that Credit Suisse cite in their report make up a large portion of sales. For decades, Hershey’s and its peers have relied on impulse purchases as customers waited in line to pay for their items. The popularity of Amazon.com, Inc. (NASDAQ:AMZN) has reduced the opportunity to profit from this sales strategy.

The downgrade doesn't come as too much of a surprise, however, as HSY has been on a downtrend since peaking in December, with the falling 50-day moving average acting as a ceiling of resistance. The stock touched a fresh two-year low of $89.10 on May 3, and is now down more than 20% year-to-date.

Influencing Factors

Analysts forecast a profit growth rate of about 12% for this year. Currently, its price to earnings (PE) stands at 18.25. This takes its price-to-earnings-to-growth (PEG) ratio to over 1.5. From this perspective, $80 stands as a fair price target.

However, revenue growth has stagnated over the last four years. Moreover, profit estimates have consistently come down over the last few months. If growth estimates do not hold up, the PEG ratio will spike. This could send the price of HSY stock well below $80 per share.

The reason for reduced profits probably lies in their lack of a competitive moat. Any moat Hershey enjoys does not extend beyond their name and their control of shelf space in brick-and-mortar retail. Like Kraft Heinz Co (NYSE:KHC) in the food space and Procter & Gamble Co (NYSE:PG) with their household products, HSY built its business on control of shelf space in traditional stores.

Hershey’s chocolate possesses few profound qualities beyond its name recognition. Without the shelf space advantage, countless numbers of small chocolatiers can now set up a Shopify Inc (NYSE:SHOP) and compete with Hershey’s.

Competition has also become a more significant issue within brick-and-mortar retailing. Stores such as Whole Foods sell dozens of varieties of organic chocolate.

Analysts and Hedge Funds Opinions

Analyst sentiment carries a pessimistic tone, with 13 out of the 15 firms following the stock sporting "hold" or worse recommendations. Further, HSY sports an average 12-month price target of $95.63, which comes in at just a 5.8% premium to current levels.

Several equities analysts have recently commented on the company…..

  • Argus cut shares of Hershey from a buy rating to a hold rating in a research report on Wednesday, May 2nd.
  • Barclays reduced their target price on shares of Hershey from $107.00 to $90.00 and set an equal weight rating for the company in a research report on Friday, April 27th.
  • Societe Generale lowered shares of Hershey from a hold rating to a sell rating and dropped their price objective for the company from $93.29 to $85.00 in a report on Friday, April 27th.
  • Finally, JPMorgan Chase & Co. dropped their price objective on shares of Hershey from $106.00 to $98.00 and set a neutral rating for the company in a report on Tuesday, April 24th.
Insider news……

Director David L. Shedlarz sold 5,450 shares of the business’s stock in a transaction on Thursday, May 24th. The shares were sold at an average price of $91.25, for a total transaction of $497,312.50.

Summary

Hershey has a current ratio of 0.61, a quick ratio of 0.40 and a debt-to-equity ratio of 2.08. Hershey Co has a 1 year low of $89.10 and a 1 year high of $115.82. The company has a market cap of $19.71 billion, a price-to-earnings ratio of 19.55, a P/E/G ratio of 2.18 and a beta of 0.34.


Option Trade – Constellation Brands, Inc. Class A (NYSE: STZ) CALLS

Monday, July 02, 2018

** OPTION TRADE: Buy the STZ AUG 17 2018 225.000 CALL at approximately $2.30 TO $2.40. Place a pre-determined sell at $4.60.

Also include a protective stop loss of $0.90.

Constellation Brands, Inc. Class A (NYSE: STZ), a producer and marketer of beer, wine and spirits with operations in the United States, Canada, Mexico, New Zealand and Italy, reported earnings on Friday morning and, while revenues were above expectations, STZ missed on the bottom line.

An EPS miss has been rare for STZ, but most of the negatives can be attributed to issues that are either cyclical (a stronger dollar, high metal costs) or part of the growth strategy (higher advertising and marketing expenses).

STZ dominates the growth numbers in the high-end beer market in the U.S., with a specific focus on imported beers appealing to the U.S. Hispanic population. The craft-beer and spirits category has also consistently grown. The company has accounted for over 35% of total beverage alcohol growth over the last year.

The EPS miss led to selling on Friday morning, but the stock stopped at support near $215 per share. A rally from here back to prior highs is likely in the short term as investors look for growth opportunities in the consumer sector.

Influencing Factors

Constellation Brands launched major additions to its beer portfolio in the most recent quarter and sharply increased marketing investments to support that brand along with its other premium beer, wine, and spirits franchises.

The extra spending contributed to weaker earnings than investors have been used to seeing from the company, but Constellation Brands stayed on track to meet or modestly exceed management's full-year sales and profit targets.

Revenue trends met expectations despite a slight drop on the spirits and wine side of the business. Core earnings posted a rare decline, meanwhile, as Constellation Brands boosted its marketing spending.

Executives said the sales pace met their targets while the earnings decline simply reflects investments in attractive growth initiatives. "We expect these investments to yield excellent returns well into the future," CEO Rob Sands explained in a press release. "I am especially pleased," Sands continued, "with the successful execution and momentum of our new product introductions, including Corona Premier and Familiar."

At the same time, CFO David Klein explained, the company's finances continue to improve. "The strong operating cash flow we delivered enabled flexibility for venture and growth investments, as well as continued share repurchases and debt repayment," he said.

Constellation Brands ended the fiscal first quarter with cash and cash equivalents of $210 million. As of May 31, 2018, it had $9,416.4 million in long-term debt (excluding current maturities) and total shareholders' equity of $10,565.8 million.

In first-quarter fiscal 2019, Constellation Brands generated $504 million in cash from operations and $335.8 million of free cash flow.

The company's solid cash flow and financials provide it with the flexibility to pay dividends.

Looking ahead…..

Management affirmed their 2019 sales and profitability outlook, and they continue to expect the beer business to expand revenue and profits by around 9%, while the wine and spirits segment boosts both metrics at a 3% pace.

The earnings growth in 2019 will be supplemented by free cash flow that's expected to jump to as high as $2.55 billion from $1.9 billion in 2018 and $874 million in 2017.

Analysts and Hedge Funds Opinions

Analysts are staying confident about Constellation Brands with Pivotal Research reiterating their buy rating on shares of Constellation Brands, Inc. Class A (NYSE:STZ) in a report published on Friday. Pivotal Research currently has a $285.00 price target on the stock.

“We expect that if the 4.5% sell-off in the shares today persists, the company will be aggressive buying its own shares in the 2Q and 3Q. Net Debt to FY EBITDA stands at 3.3x. The company booked an unrealized gain of $258.3 million on its investment in Canopy Growth so book value soared to $53.57.”, Pivotal Research’s analyst commented.

Also, Constellation Brands was upgraded by equities researchers at ValuEngine from a “hold” rating to a “buy” rating in a research note issued to investors on Thursday.

Summary

Constellation Brands has a market capitalization of $41.89 billion, a PE ratio of 25.10, a price-to-earnings-growth ratio of 1.94 and a beta of 0.06. Constellation Brands, Inc. Class A has a 52-week low of $191.06 and a 52-week high of $236.62. The company has a debt-to-equity ratio of 1.17, a quick ratio of 0.71 and a current ratio of 1.79.






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