Book Profits on Constellation Brands Before the ‘Booze Bubble’ Pops

NEW YORK (TheStreet) -- Investors should book profits on shares of Constellation Brands (STZ) , which have surged more than fourfold during the last three years.

The company has benefited from acquisitions during the rally, and it now has a huge brand inventory of beers, spirits and wines, including Corona, Robert Mondavi, Ruffino, and Svedka vodka. Its momentum, however, could be hurt by sobering slow global economic growth.

Constellation is scheduled to report its quarterly earnings before the opening bell on Thursday, and analysts expect the company to post earnings of $1.15 per share. Constellation is based in the U.S., and its earnings may have been hurt by the strong dollar as sales in countries such as Italy and New Zealand result in lower dollars on the balance sheet at home.

The company has beaten earnings estimates in each of the last four quarters. Each time the stock rebounded, but the last two post-earnings rallies were reversed. That's a sign of a popping "booze bubble." Most notably, the stock set an all-time high on July 2 following its last quarterly report, and the shares have been consolidating since then.

Let's take a look at the daily chart for Constellation Brands.

Courtesy of MetaStock Xenith

At the lower left of the daily graph Constellation Brands ($86.35) held its 200-day simple moving average (green line), which was then at $30.02. The stock has been tracking the rise of its 50-day SMA since June 2013 as the booze bubble inflated.

Post-earnings share price volatility is clearly shown. There was a huge price gap to the upside from $69.93 on Jan. 7 to $81.56 (up 17%) on Jan. 14, following the earnings beat on Jan. 8.

Sustaining post-earnings gains became difficult following the last two earnings reports. On April 9, the stock popped to $85.40 after the company reported earnings that beat analysts' estimates. Shares reversed direction and traded as low as $76.26 on April 15 (down 11%) before the bubble began to inflate again.

On July 2, Constellation Brands posted earnings that topped estimates for the fourth consecutive quarter. The stock spiked to an all-time intraday high at $94.77 at the open which proved to be an opportunity to book profits. Since then, the stock has traded as low as $82.03 on August 8, 13% off the high.

Investor Strategy Following Thursday's Earnings Report:

If the stock closes above its 50-day SMA at $36.36 on Wednesday, investors are expecting a positive reaction to earnings. Consider selling a higher open as the stock should not set a new all-time high.

On a negative reaction to earnings, the stock needs to stay above its 200-day SMA at $82.18. A gap below would confirm that the booze bubble has popped.

The weekly chart for Constellation Brands clearly shows the "booze bubble".

Courtesy of MetaStock Xenith

The steepness of the rise in Constellation Brands cshows the parabolic formation inflating the booze bubble. The choppy pattern at the upper right is a warning that the bubble could pop soon.

At the time of publication the author held no positions in any of the stocks mentioned.

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This article is commentary by an independent contributor, separate from TheStreet's regular news coverage.


TheStreet Ratings team rates CONSTELLATION BRANDS as a Buy with a ratings score of A. TheStreet Ratings Team has this to say about their recommendation:

"We rate CONSTELLATION BRANDS (STZ) a BUY. This is based on the convergence of positive investment measures, which should help this stock outperform the majority of stocks that we rate. The company's strengths can be seen in multiple areas, such as its robust revenue growth, notable return on equity, reasonable valuation levels, solid stock price performance and compelling growth in net income. We feel these strengths outweigh the fact that the company has had generally high debt management risk by most measures that we evaluated."

You can view the full analysis from the report here: STZ Ratings Report

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