This Low-Tech Stock Could Be a Big winner
Traders are often captivated by technology stocks. They are often searching for the next Apple, or the next Google, or the next Uber…the list could go on indefinitely. But, they should also consider looking for the next Monster Beverage.
The energy drink maker began trading as a soda maker, focused on the Hansen’s Natural brand. Monster was acquired to diversify and the company adopted the well known brand name as its corporate name.
Since the stock began trading in 1985, it has delivered a gain of more than 50,000%.
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For comparison, the S&P 500 has gained about 1,850% over that time. Soda and energy drinks can be very rewarding for investors.
The Next Monster Could be National Beverage
National Beverage Corp. (Nasdaq: FIZZ) makes and distributes the La Croix sparkling water franchise. It’s a company that creates a product with relatively low levels of technology but it is one that has delivered strong results.
FIZZ delivered a maximum gain of more than 1,500% from its 2007 initial public offering to its 2017 high. Since then, the stock has pulled back.
According to one analyst, part of the pullback was driven by concerns that the company could suffer in a trade war.
National Beverage Corp. had revenues of $827 million in fiscal 2017. Its cost of sales on those sales was $501 million.
In its 10-K the company states:
“The products we produce and sell are made from various materials including aluminum cans, glass, and plastic bottles … a decline in the cost of sales per case of 5.7% [fiscal 2017]. The decline in the cost of sales per case was due to favorable product mix changes and lower raw material costs.”
Not all of National Beverage’s products are made with aluminum but its hottest brand, La Croix is, which means investors ought to ask themselves how much the tariffs will affect its gross margin.
In 2017, National Beverage saw its gross margin jump by 510 basis points. I could easily see that cut by 100 or 200 bps, perhaps more as a result of higher aluminum costs.
Again, it might not seem like a lot, but when you’re talking about a smaller beverage company, it’s a lot harder to absorb these higher input costs.
On the flip side, however, it does have a popular brand so higher prices might not be as big of an issue.
The stock recently rallied sharply and came to a level on the chart that could indicate it is breaking out and ready to potentially challenge the old highs set last year.
There was no news to explain the rally in the stock. It seems as if investors suddenly noticed that this one time market leader was languishing.
The stock is trading at about 26 times next year’s expected earnings. While this might sound expensive, it is below the stock’s five year average price to earnings (P/E) ratio of 29.6. That points to possible gains from a fundamental perspective.
The latest quarterly report showed growth in sales of more than 16%, growth in earnings per share of more than 60% compared to a year ago and growth in cash flow from operations of more than 21%. The growth could be a sign of even stronger financial performance in the near term.
Trading the Trend
When a stock is expected to move higher or pull back slightly, traders could consider obtaining long term exposure to the stock to profit. A number of options strategies could be used to meet this objective.
Among those strategies is a bull put spread that can be used. The risk and reward diagram is shown below and it offers limited risk with limited potential gains. However, it is well suited for a stock which is in an up-trend.
Source: The Options Industry Council
This strategy involves two put options. One put option is bought and a second put option with the same expiration date but with a lower exercise price is sold. Selling the put option will generate immediate income, just like the more familiar covered call strategy would. But, unlike a covered call, risk is limited.
Many traders will be familiar with the idea of a covered call. This is a conservative strategy many long term investors use to generate income in stocks they own that are unlikely to make large moves.
Although the bull put spread is different than a covered call, the bull put spread strategy meets the same objective as the covered call which is to generate some income. This trade generates immediate income and carries limited risk.
A Specific Trade for FIZZ
For FIZZ, a bull put spread could be opened with the July 20 put options. This trade can be opened by selling the July 20 $95 put option for about $1.55 and buying the July 20 $90 put for about $0.85.
This trade would result in a credit of $0.70, or $70 per contract since each contract covers 100 shares. That amount is also the maximum potential gain of the trade.
The maximum possible risk is the difference between the exercise prices of the two options less the premium received. For this trade, the difference between exercise prices is $5.00 ($95 – $90). This is multiplied by 100 since each contract covers 100 shares.
Subtracting the premium from that difference means, in dollar terms, the total risk on the trade is then $430 ($500 – $70).
The potential gain is about 16% of the amount of capital risked. This trade will be for about one month and the annualized rate of return provides a significant gain.
The bull put spread in FIZZ is an example of how options are a versatile tool and could meet many of your trading objectives. In this trade, options provide income and defined risk that could be lower than owning the stock. This strategy also has a high probability of success.
These are the type of strategies that are explained and used in TradingTips.com’s Options Insider service. To learn more about how options can be used to meet your goals, click here for details on Options Insider.