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"The terrain is to be assessed in terms of distance, difficulty or ease of travel, dimension, and safety." - Sun Tsu, The Art of War

Central European Distribution Corp. (CEDC) was sold off Tuesday in a frenzied panic that pushed the stock down over 35% before the bloodbath of the day was through. At the time of this writing, CEDC was trading slightly up off the lows in after-hours trading. CEDC opened near the highs of the day and continued to fall as the day continued on. Only slight speed bumps in the road to $14 a share stood in the way as CEDC reached what appears to be a record high in trading volume, topping out at over 12 million shares traded.

The catalyst for this sharp selloff was the disappointing earnings report released Tuesday morning along with the conference call that followed. Earnings were reported at a loss of about $1.46 per share, while the street was expecting closer to a gain of $1.13 a share. Conversely, revenue exceeded expectations with over $515 million in the top line versus a street expectation of $254 million. What appears to have saved CEDC from further losses Tuesday was that relative to earnings reported, future guidance is not that bad. With forward guidance, the company expects to have between $1.05 - $1.25 per share in earnings while the street expected $1.88. The top line is expected to be in the area of $880 million to $1.08 billion for 2011.

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The huge debt load CEDC carries is forcing its hand on several fronts. CEDC has had to ask for a waiver of some of the debt covenant terms, which caused the company to take an expense related to a waiver fee. The debt-related problems are not over yet, and CEDC will have until the end of June to arrive at new terms or face an accelerated payment requirement of debt. The problem is bad enough that if CEDC is not able to navigate successfully through the economic hurdles in the next quarter, it could face a much higher insolvency risk.

Investors took note of this risk Tuesday, to be sure. During the conference call, several positive comments were made by management, which gave some hope that perhaps the worst may be upon the stock and investors that either hold on or new investors that buy may be rewarded. I highly suggest that you read over the entire conference call as I cherry picked what I think are some key positives of the report.

William Carey, CEO

…And yes, it does come at the expense of EBIT margins in Poland, but we're actually increasing our EBIT margins in Russia, where 75% of the business is today. As we look at our strategic review, it was necessary to get back on our previous market share certainly coming out of Poland. Market share loss in Poland was accelerating over the last two years and even got steeper in the last few months of August through October. And really, we could not let that continue.

One was the launch of our Zubrówka Biala, that we did in November, which was a tremendous success. And even the January data we're seeing out of Nielsen is really doing fantastic in overall market depletions, and it'll be our biggest selling brand in our company for 2011. We truly believe that this probably will be the biggest brand coming out of Poland in the near future.

The Biala launch was extremely successful, but certainly, a negative implication on our bottom line as the brand grew 2 ½ times more than we estimated. And as we have put out the promotional plan in place, we couldn't just turn off the spigot or reduce the plan as the brand was doing extremely well, not just filling up the market, but really rotating in the marketplace. But because of the investment program behind it, it was running a negative cost.

There are a lot of negative comments and statements, but I believe that they are priced - or mostly priced - into the stock at this point. Insider sales of stock are almost zero and include a stock purchase within the last 12 months. I believe this indicates that management has faith in the company.

I use a proprietary blend of technical analysis, financial crowd behavior, and fundamentals in my short-term trades, and while not totally the same in longer swing trades to investments, the concepts used are pretty similar. Based on my criteria, I have come to the following conclusion:

It appears to me that the selloff may be overdone. Granted, those that exited early in the day were rewarded for their keen quickness in mitigating losses, but those that waited and hoped may have sold near or at a short-term bottom. With the stock price already under pressure before earnings and trading below a downward sloping 200-day moving average, what we witnessed Tuesday could be the capitulation selloff that puts CEDC in the lower range of value based on forward risk and reward.

Very late in the day, I started looking at the April puts in the $15, as well as the $12.50, strike price. The implied volatility was well above 45%, and at times while I watched, the trading reached above 50%. At the same time, I was getting an oversold buying signal with the stock. The volume of the options was relatively low, and I attribute that to the stock price trading under $20, making the stock practically a never-ending option. This is not unlike the article I wrote about MWW or the article I wrote about V. Both stocks paid off well.

I will be looking at the opening of CEDC to write put options when the volume should be the greatest in the day and/or to buy some stock which I likely will write calls against. I am not looking to hit a home run with CEDC, but I think the option premium, combined with what I believe to be a likely increase in share price in the next month, should offer a reasonable risk to reward.

Source: Central European Distribution: Opportunity Lies in Option Premium and Likely Share Price Increase