Late last year, Wall Street fell back in love with the retail sector. The SPDR S&P Retail (ETF) (NYSEARCA: XRT ) rose 10% in December and 20% since September. Investors were encouraged by better online sales and year-over-year increases that drove retail stock prices sharply higher. I remain a bit of a skeptic since I suspect that that these online sales increases are cannibalization from their own foot-traffic. I think it's unlikely that brick-and-mortar retail figured out ten years of mistakes in one quarter.
Nevertheless, stocks like Constellation Brands, Inc. (NYSE: STZ ) that are not brick-and-mortar retailers also benefit from the positive trend. Even if I am right about the traditional retail sector not being fixed, STZ is one of few retail stocks that I actually like for the long-term.
STZ is similar to brands like Nike Inc (NYSE: NKE ) that will do well under current macroeconomic conditions regardless of their outlets. Meaning, consumers will get their STZ drinks one way or another and therein lies my opportunity.
Today, STZ stock is down on an earnings headline, but this too shall pass. I bet that the stock will find footing soon and stay in favor with investors into 2018. Especially now that the company announced more buybacks, which will play into my strategy here.
Fundamentally, STZ stock is not cheap with a price-to-earnings ratio of 28X. This is triple that of say Molson Coors Brewing Co (NYSE: TAP ), but you get what you pay for. The stock is up 48% in 12 months, while TAP is down 18%. But still, STZ is not cheap - not even in absolute terms. Compare it to Apple Inc.'s (NASDAQ: AAPL ) P/E under 20X.
The STZ Stock Trade
Technically, I see two pivot points below. The first is around $219-per-share and the next at $212. These should provide support. If this selling persists, the bears may want to retest the more important $208-per-share zone. Owning it around these support levels is not likely to be a major mistake and that's integral to my trading style.
Analysts on Wall Street agree with my bullish thesis on Constellation Brands since it is now trading almost 10% below their average price targets. The difference is that I will profit from the support, independently from needing a rally.
The Bet: Sell the STZ Feb $200 put for $1. Here, there's an 80% theoretical chance of success. Otherwise, and if price falls below it, I would own shares and suffer losses below $199.
Selling naked puts comes with big risk, especially for a three-digit retail stock that is falling on a headline. For those who want to mitigate it, they can sell a spread instead.
The Alternate Bet: Sell the STZ Feb $200/$195 bull put spread, where there's about the same odds of winning, yet the spread would yield 12% on risk.
Ultimately, investing in stocks is fraught with danger, so I never risk more than I am willing to lose.
Get my newsletter for free here . Nicolas Chahine is the managing director of SellSpreads.com . As of this writing, he did not hold a position in any of the aforementioned securities. You can follow him as @racernic on twitter and stocktwits .
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