Make Money While Drowning Your Sorrows

10/09/2013 8:00 am EST


If the US government dysfunction in Washington is getting you down, Greg Pugh of offers a covered call trade idea for a beverage company whose brands include Corona beer, Blackstone wine, and Black Velvet Canadian whiskey.

Constellation Brands (STZ), together with its subsidiaries, produces and markets beverage alcohol. The stock was reiterated with a buy rating by analysts at Stifel Nicolaus. The firm raised its price target on the stock to $69 from $64. STZ, Thursday, posted better-than-expected Q2 results and said for FY 2014 it expects EPS of $2.80 to $3.10 per share. The Street is at $2.83 per share. STZ is up 2.3% at $61.55, near the stock's 52-week high of $62.15.

Here is a covered call strategy:

Strategy: Look at the January 2014 60 covered call. For each 100 shares of Constellation Brands (STZ) stock you buy, sell one January 2014 60 covered call option for a $57.38 (61.58 - 4.20) debit or better. That's potentially a 4.6% assigned return.

Comment: The technicals for STZ are bullish with a strong upward trend. The stock has had support recently around 56.50. S&P rates this stock 4 STARS (out of five) a buy.

Risk: The stock has to drop 6.8% to threaten the breakeven point. This trade rates 3 keys out of 5—moderate relative risk.

Research: S&P maintains buy recommendation on shares of STZ. On revised forward multiple analysis, we lift our target price by $2 to $66 and our FY 14 (Feb.) and FY 15 EPS estimates by $0.12 and $0.07 to $2.90 and $3.55, respectively. Adjusted Aug-Q EPS of $0.96, vs. $0.71 exceeded our estimate of $0.85 on a significantly lower tax rate and expenses than our forecast. Crown depletions rose 7% on a strong summer selling season driven by healthy growth in Corona, as well as expanded distribution for Modelo Especial. As production ramps in the Piedras Negras facility, we look for margins to improve in the beer segment.

By Greg Pugh of

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