A CEO Highlights a Company’s Stock
We often think of CEOs as corporate titans, presiding over board meetings and presenting a positive image of the company. We rarely think of them as controversial and when one does become the subject of controversy, they are often rapidly replaced.
But, that’s not always the case. Occasionally, a CEO can bring attention to their company and seem to rally the stock price. That appears to be the case with Nick Caporella, the CEO of National Beverage Corp (Nasdaq: FIZZ).
You may not be familiar with the company’s name, but you have probably seen their products. National Beverage makes sparkling waters under the LaCroix, LaCroix Cúrate, LaCroix NiCola, and Shasta Sparkling Water brand names.
The company also makes energy drinks and shots under the Rip It brand name; juice and juice-based products under the Everfresh, Everfresh Premier Varietals, and Mr. Pure brand names; and carbonated soft drinks in various flavors under the Shasta and Faygo brands.
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All together, these brands generated almost $870 million in sales over the past twelve months. The company has also been profitable with growth in earnings per share averaging more than 18% a year over the past seven years.
The company’s financial success can be seen in the stock price of FIZZ. The stock price soared more than 2,980% from its bear market lows before peaking in September.
The company’s CEO became accustomed to seeing the stock price move up and did not react quietly to the 27% decline that followed in the month after the stock’s peak.
Short Sellers Are Assigned Blame
Caporella, according to CNBC, is complaining about speculators in his stock. The network noted that the CEO issued a press release that “is peppered with exclamation points and all-caps.”
The release noted that just 15% of daily trading volume in the stock is based on how the company is doing. More than 50% of the trading, according to the CEO, is being done by gamblers.
Specifically, Caporella believes short sellers are in a “stampede aboard.” Short sellers are traders who borrow shares to sell them and then buy them back later hoping to profit, seeking to benefit from a price decline.
“If you have the opinion that I, Nick Caporella, am angrily exercised while extremely fortunate to be guiding FIZZ, your opinion is quite accurate!” he wrote.
Analysts blame the recent price weakness in the stock on rival Coca-Cola (NYSE: KO) which recently announced plans to buy rival Topo Chico, maker of lime flavored mineral water.
An analyst at Susquehanna Financial recently put a tepid rating on FIZZ and suggested the market for flavored sparkling water is getting crowded. An analyst with Credit Suisse said the probability of FIZZ being acquired is reduced because the shares are too expensive and possible bidders are building their own sparkling water brands.
Caporella disagrees. “Are perpetrators stimulating self-serving movement by stating falsehoods, creating rumors and deliberately manipulating FIZZ value? We think so,” he said in his press release.
CNBC noted that short interest in the stock, as reported by Nasdaq, is about 2.1 million shares, but that is down from various points during the summer and last year around this time. Average daily trading volume in the shares for the last three months was 318,000 out of a total of 46 million shares outstanding.
Short sellers could face problems finding shares to buy back. Caporella, whose net worth according to Forbes is $3.7 billion, owns about 75% of the company’s stock, restricting the float and potentially making the stock prone to volatility.
Implementing a Strategy to Benefit From the Analysis
FIZZ is set to release earnings soon and the company tends to rally an average of almost 7% in the week after that announcement. Based on past performance, it seems reasonable to expect the stock price of National Beverage to move higher for at least the next few weeks.
The stock price appears to be forming a bottom on the short term chart shown below.
That indicates traders should consider strategies that provide bullish exposure to the stock.
To benefit from potential gains in FIZZ that are expected over the next few weeks to months, an investor could buy shares of the company. This requires a significant amount of capital and exposes the investor to standard risks of owning a stock.
To reduce the risks of a trade, an investor could purchase a call option. This allows them to benefit from upside moves in the stock while limiting risk to the amount paid for the options. However, buying a call option can also require a significant amount of capital and includes the risk of a 100% loss.
Whenever an option is bought, the maximum risk is always equal to 100% of the amount spent to purchase the option. Since options cost significantly less than a stock, the risk in dollar terms will usually be relatively small to own an option.
To further limit the risks of the trade, an investor could use a bull call spread. This strategy consists of buying one call option and selling another at a higher strike price to help pay for the cost of buying the first call. The spread strategy always reduces the risk of an options trade.
This strategy is designed to profit from a gain in the underlying stock’s price but has the benefit of avoiding the large up-front capital outlay and downside risk of outright stock ownership. The potential risks and rewards of this strategy are summarized in the chart below.
Source: The Options Industry Council
Both the potential profit and loss for the bull call spread are limited. The maximum loss is equal to the net premium paid when the trade is opened. The maximum profit is limited to the difference between the strike prices, less the debit paid to put on the position.
A Specific Trade for National Beverage
For FIZZ, the December 15 options allow a trader to gain exposure to the stock through the expected period of seasonal strength.
A December 15 $110 call option can be bought for about $5.45 and the December 15 $115 call could be sold for about $3.70. This trade would cost $175 to open since each contract covers 100 shares of stock.
The amount paid to enter the trade is the largest possible loss on the trade. This is generally true whenever a trader is creating a debit to enter an options trade. “Creating a debit” means there is a cost to enter the trade. You could create a debit by simply buying puts or calls to open a directional trade.
In this trade, the maximum loss would be equal to the amount spent to open the trade, or $175.
The maximum gain on the trade is equal to the difference in exercise prices less the amount of the premium paid to open the trade.
For this trade in FIZZ the maximum gain is $3.25 ($115 – $110 = $5.00; $5.00 – $1.750 = $3.25). This represents $325 per contract since each contract covers 100 shares.
Most brokers will require minimum trading capital equal to the risk on the trade, or $175 to open this trade.
That is a potential gain of equal to 185% of the amount risked in the trade. The trade could be closed early, immediately after the earnings announcement, if the maximum gain is realized before the options expire.
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