This Beverage Maker Could Provide a Big Gain to Investors
As reported by Barron’s,
“Shares of Monster Beverage jumped as investors cheered the company’s latest earnings report, indicating confidence in management’s ability to manage challenges that face the energy drink maker.”
Barron’s continued, “Investors this year have been wary of the company’s position between quarterly updates then applauded when the numbers finally come out.
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The latest sales and earnings numbers both beat Street estimates, with the company turning in quarterly revenue of $946 million and earnings of 48 cents per share.
They come as the company has faced challenges on several fronts. They include margin pressure, which Monster has addressed in part through price increases; new domestic competition, at which the company has directed a new product called “Reign,” among other efforts; and ongoing arbitration with Coca-Cola (KO), its key distribution partner and part owner, over whether some of that company’s new drinks violate the terms of their pact. ( Amazon.com (AMZN), it may be worth noting, also released a private label energy drink in March.)
Whether you’re bullish or bearish on Monster ultimately depends on whether you think the company has those issues in hand. FactSet’s average price target, which has risen in 2019, is around $67.”
“We continue to believe in the company and our growth strategy and remain committed to continuing to innovate, develop and differentiate our brands and to expand the company both at home and abroad,” CEO Rodney Sacks said on a conference call.
“We view this quarter as a very encouraging start to the year,” wrote Cowen analyst Viven Azer, who has a $74 price target and an Outperform rating on the shares, citing “consistent top line growth, better profitability, continued aggressive international expansion, and effective innovation.”
At Macquarie Research, Caroline Levy maintained a Neutral rating while raising her price target by $10 to $63. “We remain on the sidelines because we see heightened share risk from an increased competitive environment in the U.S. and continued margin pressure as international growth outpaces U.S. growth,” she said.
The stock has been in an extended trading range and this news could provide a catalyst to push the stock towards its recent highs.
A Trade for Short Term Bulls
As with the ownership of any stock, buying Monster Beverage Corporation (Nasdaq: MNST) could require 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 of 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.
This strategy could be especially appealing with high priced stocks where the share price and options premiums are often a significant commitment of capital for smaller investors.
A Specific Trade for MNST
Every day, we scan the markets looking for trades with 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.
For MNST, the June 21 options allow a trader to gain exposure to the stock.
A June 21 $65 call option can be bought for about $1.55 and the June 21 $70 call could be sold for about $0.35. This trade would cost $1.20 to open, or $120 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 $120
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 MNST the maximum gain is $3.80 ($70 – $65 = $5; $5 – $1.20 = $3.80). This represents $380 per contract since each contract covers 100 shares.
Most brokers will require minimum trading capital equal to the risk on the trade, or $120 to open this trade.
That is a potential gain of about 216% in MNST based on the amount risked in the trade. The trade could be closed early if the maximum gain is realized before the options expire.