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A Spectacular Commentary Isn’t Enough to Save This Stock

A Spectacular Commentary Isn’t Enough to Save This Stock

Earnings announcements are usually bland. But not always. National Beverage Corp., the maker of LaCroix seltzer, recently announced earnings. Bloomberg’s Matt Levine summarized the news, “The earnings were bad. The announcement was very, very good:

“We are truly sorry for these results stated above. Negligence nor mismanagement nor woeful acts of God were not the reasons – much of this was the result of injustice!

Managing a brand is not so different from caring for someone who becomes handicapped. Brands do not see or hear, so they are at the mercy of their owners or care providers who must preserve the dignity and special character that the brand exemplifies.

It is important that LaCroix’s true character is not devalued intentionally − in any way. National Beverage Corp. is and will remain the preeminent innovator that adds zest and authenticity to the ‘sparkling water’ phenomenon in North America,” stated Nick A. Caporella, Chairman and Chief Executive Officer.

Then there’s a boring paragraph about gross margins and taxes. Then:

“There is no greater passion than the kind that creates the wonderful refreshment and contentment described as unique! No doubt, the sound and personality of the word LaCroix, coupled with the awesome experience of its essence and taste … is unique.

One can be induced to purchase by cheapening price or giving away a product, but falling in love with a feeling of joy is the result of contentment. Just ask any LaCroix consumer . . . Would you trade away that LaLa feeling?

‘No way, they shout – We just love our LaCroix!’ I am positive they respond this way each and every time,” Caporella concluded.

The report was also noticed by Market Watch which commented:

Companies announce earnings in news releases typically titled “Company reports fourth-quarter earnings,” or “Company delivers record-breaking second quarter.”

National Beverage Corp. has never quite followed that path, but Chief Executive Nick Caporella deviated from the script in a much more extreme way Thursday.

The company that makes the LaCroix brand of sparkling water headlined a Thursday earnings release, “‘We Just Love Our LaCroix’ Consumers Chant,” and it only got weirder from there. Besides a boilerplate first sentence stating what results National Beverage(Nasdaq: FIZZ)  was announcing and the numbers, the entire release was a long, rather unhinged quote from Caporella.

Caporella’s rant did not specify exactly what injustice caused National Beverage to sell fewer cans of flavored sparkling water than was expected. Instead, he moved on to an awkward metaphor, comparing his job of managing a company that sells packaged drinks to caring for a disabled person.”

Not everyone was impressed.

“Nathan Yates, a professor of economics and finance who has spinal muscular atrophy, a form of muscular dystrophy, reached out to MarketWatch on Twitter after reading this story to share his anger about the characterization.

“We in the handicap community definitely don’t agree with the CEO’s stereotype of disability,” Yates wrote. “We’re not vegetables who can’t do anything for ourselves. Our handicaps rarely make us entirely useless as was indicated by the company’s press release.”

Both Caporella and LaCroix have faced troublesome accusations of late. Caporella has been accused of inappropriate touching by two pilots, The Wall Street Journal reported in July, and a class-action lawsuit filed last year accuses LaCroix — which is billed as “naturally essenced” sparkling water — of false advertising for using artificial ingredients.

A National Beverage spokesman said that the injustice of which Caporella spoke was the class-action lawsuit, which accuses LaCroix of containing chemicals also found in cockroach insecticide.

On the comparison of managing a brand and caring for a handicapped person, he said that Caporella meant that “it just requires a lot of tender, loving care.”

“We are not a typical company,” the National Beverage spokesman told MarketWatch. “What comes out in the writings and the releases is the passion and intensity that we have for our consumer and for our products.”

The release ended with Caporella harking back to the odd title, before his signature signoff of “‘Patriotism’ – If Only We Could Bottle It!”

Traders did not seem to be impressed.

FIZZ daily chart

The longer-term chart shows continued weakness is likely.

FIZZ weekly chart

A Trading Strategy To Benefit From Weakness

A price decline often results in higher than average options premiums. That means option buyers will be forced to pay higher than average prices for trades, But, sellers could benefit from the higher premiums.

In this case, with a bearish outlook for the short term, a call option should be sold. The call should decline in value if the stock declines and sellers of calls benefit from this decline.

Selling options can involve a great deal of risk. A spread options strategy can be used to limit the potential risk of the trade.

One strategy that traders can consider is the bear call spread. This is a trade that uses two calls with the same expiration date but different exercise prices.

Traders buy one call and sell another call. The exercise price of the call you sell will be below the exercise price of the long call. The call is sold to limit the risk of the trade. So, this strategy will always generate a credit when it is opened and will always have limited risk.

The risk profile of this trading strategy is summarized in the diagram below which shows the limited risk and reward.

bear call spread

Source: The Options Industry Council

While risks and rewards are limited, this strategy will allow traders to generate potential gains in a stock they might otherwise find too risky to trade. Many individuals ignore bearish strategies because of the risks.

You’ll know the maximum potential gain with this strategy as soon as it’s opened. It is equal to the amount of premium received when the trade is opened. The maximum loss is equal to the difference between the exercise price of the options contracts less the premium received and is also known.

Every day, we scan the markets looking for trades that carry low risk and high potential rewards. These trades are available almost every day and we share them with you as we find them. Now, it’s important to remember these are trading opportunities in volatile stocks.

When we find a potential opportunity, we evaluate it with real market data. But because the trades are volatile, the opportunities may differ by the time you read this. To help you evaluate the current opportunity, we show our math and explain the strategy.

A Bear Call Spread in FIZZ

For FIZZ, we could sell an April 18 $57.10 call for about $3.85 and buy an April 18 $60 call for about $2.45. This trade generates a credit of $1.40, which is the difference in the amount of premium for the call that is sold and the call.

The unusual strike price is due to a corporate restructuring.

Remember that each contract covers 100 shares, opening this position results in immediate income of $140. The credit received when the trade is opened, $140 in this case, is also the maximum potential profit on the trade.

The maximum risk on the trade is about $150. The risk can be found by subtracting the difference in the strike prices ($290 or $2.90 times 100 since each contract covers 100 shares) and then subtracting the premium received ($140).

This trade offers a potential return of about 93% of the amount risked for a holding period that is relatively brief. This is a significant return on the amount of money at risk. This trade delivers the maximum gain if FIZZ is below $57.10 when the options expire, a likely event given the stock’s trend.

Call spreads can be used to generate high returns on small amounts of capital several times a year, offering larger percentage gains for small investors willing to accept the risks of this strategy. Those risks, in dollar terms, are relatively small, about $150 for this trade in FIZZ.

For more information on options click here for our free guide, The Ultimate Guide to Options Trading.