Even growth stocks require some form of valuation analysis. The price earnings ratio (how expensive a stock is compared to its earnings) is a starting point. Monster Beverage has a trailing P/E of 43 and a projected P/E of 33 (using next year’s estimated earnings). MNST has been the best performing stock in the S&P 500 over the last 25 years. Therefore, it has always looked expensive compared to its trailing and projected earnings over that period. The solution is to use the PEG ratio or the comparison of the price/earnings ratio to its earnings growth rate. Historically, Monster has traded at a PEG ratio of 2.5 times. It is currently trading at a PEG ratio of 1.6 times. Therefore, it is inexpensive compared to its history.
Will Monster Beverage perform as it has in the past?
It is one of the few growth stocks in the consumer defensive sector. Therefore, we could say that its cash flows are less volatile than most technology stocks as well as all cyclical stocks. Historically, the firm has demonstrated a genius level of marketing. Their new potential markets are overseas as well as women (their customer demographics currently skew to younger males). Therefore, I conclude that the firm will be able to achieve analysts’ projected five earnings growth rate of 24%.
Improving Our Odds of Success
Rather than purchasing the stock outright in a volatile investment environment we can improve our odds of success by buying the stock at a price that is 9 to 10 percent less than its current price. We can do that by selling a put option on MNST. That means that we have given someone else the right to sell the stock to us at a lower price than it is currently trading for in the market. As investors we earn a premium for giving this sale option to another investor. That income premium is currently in the range of 1 to 2%. The net result is that we earn a bit of income while we wait to see if the stock is “put” to us at a lower price. The specifics of such a recent strategy are below:
MNST put option expires 12/15/2023 with an exercise price of 52.50.
A Strategic Way to Control Purchase Price
We are required by the custodian to have the cash readily available to purchase the number of shares that we agreed to buy. As I write this, the stock is currently trading for $58.67. Therefore, the stock would need to decline by about 10% before 12/15/2023 for us to have the opportunity to purchase the shares at a lower price from another investor. The worst case scenario is that the put expires worthless in a bit more than 90 days and we have received a small bit of premium income while we waited to see if the transaction will occur.
Disclosures
This commentary reflects the personal opinions, viewpoints and analyses of the author providing such comments, and should not be regarded as a description of advisory services provided by Defiant Capital Group or performance returns of any Defiant Capital Group client. Any mention of a particular security and related performance data is not a recommendation to buy or sell that security. Defiant Capital Group manages its clients’ accounts using a variety of investment techniques and strategies, which are not necessarily discussed in the commentary.
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A word on risk
All investments carry a certain degree of risk, including possible loss of principal, and there is no assurance that an investment will provide positive performance over any period of time. Equity investments are subject to market risk or the risk that stocks will decline in response to such factors as adverse company news or industry developments or a general economic decline. Debt or fixed income securities are subject to market risk, credit risk, interest rate risk, call risk, tax risk, political and economic risk, and income risk. As interest rates rise, bond prices fall. Non-U.S. investments involve risks such as currency fluctuation, political and economic instability, lack of liquidity and differing legal and accounting standards. These risks are magnified in emerging markets. This report should not be regarded by the recipients as a substitute for the exercise of their own judgment. It is important to review your investment objectives, risk tolerance and liquidity needs before choosing an investment style or manager.