Tuesday, January 24, 2012

MNST: Monsters in a can

Monster Energy, Java Monster, Monster Energy Extra Strength Nitrous Technology, Monster Rehab, Peace Tea, Hansen’s, Hansen’s Natural Sodas, Junior Juice, Blue Sky, X-Presso Monster, Vidration, Worx Energy, Admiral, Lost Energy, Hubert’s, Rumba, Samba and Tango.

The company? The chart? The finances? Fuggedaboutit! Monster Beverage Corp. (MNST), first and foremost, simply has some of the coolest drink names in the business.

That's not exactly a bullish indicator, of course. Monster's energy drinks don't yet threaten to stomp all over Coke and Pepsi like Godzilla did to Tokyo.

But the chart is fairly impressive. And the financials are in growth stock territory. And the company's stock is emulating one of its drinks, Blue Sky. The price has been in blue sky territory, above all previous prices, for more than four years.

The stock touched its recession low of $11.73 in November 2008. It's interesting to note that the month, despite the sharp fall, ended with the stock at $29.75. Altogether, the monthly range was an astonishing $18.24, nearly two-thirds of the closing price.

Since then the price has been on the upward track, with a few short-lived corrections.

The most recent leg up began on Jan. 12 at $93.13, and made a highest-high today of $105.99 (so far).  

The sharpest daily rise of the leg, last Friday, showed a peak in volume, which declined significantly the next  day, Monday. The peak volume for MNST the past few days has tended to come in the final hour of trading, and that level has declined for three days running.

The highest volume so far today came in the 11 a.m. Eastern hour, which had the smallest distance of the day between the open and a higher close.

Generally, a rise on declining volume suggests there's not much conviction among bull-side traders. So the volume I'm seeing on MNST's charts suggests that traders are losing interest.

MNST had the most bullish chart among 24 stocks added today to the Zacks top buy rating. NVLS was 2nd, followed by ROP at 3rd and POL at 4th. (See my essay "10,000 Charts" for a discussion of how I screen.)

MNST's return on equity is 32%, a figure that indicates really effective management, and it has zero debt. So the company is strongly positioned to handle crises that might arise in the course of doing business.

Strong financials alone will often bring in investors. That is the case with MNST, whose stock price has been bid up to $5.67 for each $1 in sales. Institutional ownership is 72%, a respectable level but not in the top rank.

The average volume is 888,000 shares. That's a good degree of liquidity, and it supports a handsome selection of options -- 17 strike prices at $5 intervals, with narrow spreads.

Average implied volatility is 36%, compared to 19% for the S&P 500. High volatility is sometimes treated as a measure of fear -- the higher it is, the more traders are worried about the company.

However, MNST's volatility was running in the upper 40% range last November. It bottomed on Jan. 13 at 29%. So the level is low compared to mid-term levels, but rising in the short run. Near term, there's a divergence, and the direction is back toward the November levels. To complicate the picture, volatility fell today.

That pattern must be figured into any decision about how to play the stock. A trader wants to buy low volatility and sell high volatility. That means for low volatility, buy stocks and options for a debit. For high volatility, sell options for a credit.

MNST announces earnings on Feb. 23. It is scheduled to undergo a 2:1 split on Feb. 15.

Decision for my account: I bought call options today. I settled on the $105 strike, just in the money, with a June expiration. I went for a long, debit position because of the mid-term low implied volatility and today's downward turn.

Tim Bovee, Private Trader tracks the analysis and trades of a private trader for his own accounts. Nothing in this blog constitutes a recommendation to buy or sell stocks, options or any other financial instrument. The only purpose of this blog is to provide education and entertainment.
No trader is ever 100 percent successful in his or her trades. Trading in the stock and option markets is risky and uncertain. Each trader must make trading decision decisions for his or her own account, and take responsibility for the consequences.

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