When a company sees revenues and earnings both decline not one but several quarters in a row, you know investors aren’t going to be happy. When you see both of those things and significant misses on analyst estimates back-to-back quarters, you know that stock is in for a rough year.
All of this is especially true for an industry seen as old and top heavy, with ever-narrowing economic moats and declining consumer demand for its products.
So, it should be no surprise what’s happened to a company like Molson Coors Brewing (TAP) over the last few years:
The maker of Coors, Blue Moon and Molson has not exactly pleased investors since its massive merger back in 2005. During the next decade and a half, competition from craft beers and locally-made brews has exploded.
Now, beer aisles are filled to the brim with too many choices. Despite Molson Coors and its other major competitor Anheuser-Busch InBev’s efforts to buy up and rebrand a selection of these craft brands, there never seems an end to this competition.
Molson and InBev aren’t going away, however. And that’s where today’s opportunity comes in.
You see, each have made great efforts to cut costs and streamline profits. While craft sales might be rising and traditional sales slip, margins are expanding for these bulk beer producers.
Molson is an extremely profitable company. It has large, stable free cash flows and now pays an industry best 4.3% dividend. And for some smart investors, that’s only the start.
You see, that 50% decline from more-than-$100 share price comes just in time for the greatest catalyst a company like Molson can hope for. Sad to say, recessions are good for these kinds of plays.
Now, I’m not saying we’re going to see one. But an economic downturn is already on us, with a recent negative manufacturing growth report, trade stifling and fast-dropping consumer confidence, beer selection is already changing.
An $18 case of Coors Light looks a lot better than a $9 six-pack of your local favorite when income tightens. And that’s the bottom line for a TAP investor.
The company should see a clear bounce from here. It has already fallen to extreme lows in comparison with its peers. Though InBev has struggled just as much as Molson, investors have been favoring it for its wider geographic reach.
Right now, InBev trades at twice the multiples Molson does. And with Molson’s recently successful cost-cutting measures and market penetrations in Latin America and Asia, investors are noticing.
Already, we’ve seen a small uplift in TAP share price over the last two weeks. That should continue as investors settle into this new economic mind frame.
Over the next few weeks, the share price difference between InBev and Molson should tighten, giving smart traders a quick chance at profits.
Of course, you could simply buy shares of Molson and take advantage of that dividend. But a bounce here doesn’t necessarily mean TAP is going to return to $100 per share any time soon.
Instead, there’s a far better strategy, one that lets traders leverage this bounce without risking a fortune to do so. Let’s get right into it…
A Strategy For Short Term Bulls
A bull call spread trade is a type of options play that involves buying a call option with a near-the-money strike price and selling a second one with a higher strike. The income from this second helps offset the cost of the first, thereby reducing the overall price tag of the trade.
In exchange for that reduced cost, and therefore the total amount at risk, the maximum potential profits are capped. But in the case of Molson, we already noted it is unlikely to double in price in the short term. So, this trade off makes a great deal of sense.
You can see how this strategy plays out…
Source: The Options Industry Council
Clearly, this strategy works best when a stock bounces upwards quickly. It doesn’t have to be a huge jump, however. And that’s what makes it the perfect way to play TAP today.
Let’s look at a specific example to see just how much this kind of trade can profit on TAP’s near-term bounce.
A Specific Trade on TAP
Right now, a trader could buy an October 18 $55 call on TAP for $1 per share and sell an October 18 $57.50 call for $0.30 for a total cost of $0.70 per share. Since each call is worth 100 shares of TAP, that’s a net debit of $70.
That $70 is the total amount at risk for the duration of this trade. Even if TAP shares linger for another few months, that’s all that could be lost here. The profit potential, however, is far greater.
If investors begin to see the wisdom of holding such an economically-stable company with a sizable dividend, shares should climb. Even a small climb up to $57.50 would make this trade exceptionally profitable.
To find how just how much, take the difference in strike prices ($57.50 – $55 = $2.50), and subtract the cost ($2.50 – $0.70 = $1.80). Again, on 100 shares, that’s a maximum profit potential of $180.
In other words, if shares just tick up another few dollars, our trader would be sitting on a 257% return on the amount he put at risk.
With so much going on economically and so many worry signs out there, the inevitable flight to safety and recession resistant plays is coming. Molson, with its perfect place in the market, brand value, cash flows and large dividend, is definitely going to take quick advantage.