National Beverage (FIZZ) was one of the worst-performing beverage stocks of 2018, down 26%, and has followed this poor performance up with another 20% decline for the first quarter of 2019. Several investors are scratching their heads as to how the stock could perform so poorly with such a great product, and earnings are continuing to grow. Even though FY-2020 earnings are expected to reach another new high of $3.37, the stock is below its Q1 2017 levels when its earnings were 30% lower. The explanation for this is that the market is not always linear, nor does it always make sense. In a seemingly irrational arena like the stock market, the only remedy is to have a plan to save oneself from the outliers. A concrete trading strategy armed with stop-losses would have saved investors a lot of grief on this name and would have had them selling out the stock near the $100.00 level.
In Q1 2017, just as the market was refilling its tank while digesting some of its post-presidential election gains, National Beverage was taking off to the upside. The stock put in a new all-time high the week of March 10th, 2017, and did not look back in what was a parabolic six-month advance for the stock. I initially went long the stock at $55.00 per share as the earnings growth was attractive, with the stock set to grow annual earnings per share (EPS) by 70% to a new high of $2.29 for FY-2017. I sold out of my position into strength on the way up, exiting my position for an average price of over $94.00 per share. At the time, earnings growth estimates remained strong and quarterly revenues remained at strong double-digit levels, but the chart had gone from bubbling enthusiasm to turning flat. When my defensive stop levels get hit, I don't ask questions, I get out - and that is why I exited the last of my position in Q4 2017.
Unfortunately, many investors stayed the course with the belief that the share price had to ultimately climb higher, with earnings and revenue growth still on the table. The problem is that a faithful marriage to the fundamentals without a watchful eye on the technicals can be a disastrous combination. I believe that trading on fundamentals alone is like driving with an eyepatch over one eye, as one can only see half of the picture to an investment thesis. While earnings growth typically is correlated with share price appreciation, the market got ahead of itself in Q3 2017 with National Beverage trading at $129.00 per share, and the smart money was busy heading for the exits in Q4. We can see proof of this in the example I've shown below of the accumulation present when I entered the stock (Q1 2017) and the distribution that showed up in Q3 2017 when I was out of most of my position.
(Source: Author's Photo)
The only way to exit this position properly was by being agnostic to the rosy fundamentals and placing at least some weight on the breakdown in the technical picture. A concrete stop-loss order would have had most position traders selling at the $100.00 level, as this was the time when the stock broke below its key moving averages and the majority of technical damage occurred. While the stock did go on to re-test its highs, this was just a second chance for those that didn't sell when the warning signals showed up at $100.00 to get out of the way.
It is great to have a conviction on a company, and it certainly helps to know as much as possible about the fundamentals. Having said that, one has to have an exit plan for the times when they get the fundamentals wrong or when the fundamentals have already discounted what a trader believes he has figured out. It is helpful to know everything about a company, but it doesn't help if the market has figured all of this out too and has already priced all of that into the stock. I don't know of any other way of figuring out if the market has discounted something besides watching the technicals, as they are the final arbiter. It's great to be right as the fundamental investors were on National Beverage, but it's silly to care more about being right than making money. This is where a stop comes in - a point at which one takes their profit and moves on.
I believe Marty Schwartz has one the best quotes ever discussed on stops from his book Pit Bull, and I will share it below, as it has helped me tremendously:
"One of the great tools of trading is the stop. The point at which you divorce yourself from your emotions and ego, and admit that you're wrong. Most people have a tough time doing this, and instead of selling out a losing position, they'll hang on, hoping the market will realize the error of its ways and behave as they believe it should. This attitude is usually self-destructive. They know how much of a profit they're willing to take, but they don't have the foggiest idea how much they're willing to lose. They're like deer in the headlights; they just freeze and wait to get run over. Their plan for a position that goes south is 'Please God, let me out of this and I'll never do it again.' But that's a lie, because if the position turns around, they'll soon forget about God. They'll go back to thinking that they're geniuses and they'll do it again which means they're sure to get caught, and get caught bad. What most people fail to understand is that while you're losing your money, you're also losing your objectivity."
In the above excerpt, Marty Schwartz is discussing divorcing a trade when one is losing before things get worse and one's objectivity is completely lost. I believe the same applies to an investor giving up all of the profits in a trade - as many investors in National Beverage have done if they stuck with the stock. There is absolutely no reason ever to allow a 35% or larger gain to come back and become a loser, but some investors have justified doing this due to their unwavering confidence in their understanding of the fundamentals. I can confidently say that I knew much less than many investors in National Beverage did who pored over multiple quarters of financial results for the stock, but at the end of the day, I'm only concerned with making money. This is why I exited the stock at the proper time and made out with a reasonable profit, and some less fortunate investors are caught holding the bag.
So, how does the stock look currently? Let's take a look.
As we can see from the below table of annual earnings per share, the stock continues to see annual EPS grow but is expecting a slight down-tick for FY-2019 based on estimates. This is not a huge deal in the bigger picture, as FY-2020 annual EPS estimates are expected to hit a new high. Having said that, the stock has seen a clear deceleration in earnings growth from prior years where earnings were growing at a pace of over 25% in 2016, 75% in 2017, and 40% in 2018. FY-2020 earnings growth is expected to see growth of 7%, if the analysts are correct in their estimates.
(Source: YCharts, Author's Chart)
(Source: YCharts, Author's Chart)
In terms of National Beverage's revenues, things are a lot less rosy, and the smart money exiting above $100 per share got this one right. While revenue growth was growing at a pace of strong double digits for much of 2017, this revenue growth slipped to single digits in Q3 of last year, and the company saw negative year-over-year revenue growth for Q4 2018. This is anything but ideal, as sustainable earnings growth requires growth in revenues. Without revenue growth, most spurts higher in earnings are short-lived, as they are based on cost-cutting measures or favorable tax policies.
(Source: YCharts, Author's Chart)
As we can see from the chart I've built of quarterly revenue, National Beverage's earnings are in a sideways range and are not in sync with earnings, which is in a clear uptrend. This can sometimes be a red flag, and the company is going to want to see top line growth to achieve a meaningful turnaround in the share price that lasts more than just a couple quarters.
(Source: YCharts, Author's Chart)
Looking at a daily chart of the stock, National Beverage is beginning to get oversold short term and could easily see a bounce from these levels. The problem is that oversold bounces that aren't coupled with a material change in the fundamentals are often short-lived. There has been absolutely no reason to buy the stock since it dropped beneath its 150-day moving average at $105.00 in October of last year, and it has been an avoid or short for trend-following strategies since. I have no interest in the stock here, as while it could bounce 15-20% off of oversold levels, I don't like to buy stocks in bear markets with decelerating revenue growth.
One of the long-term stop strategies I use is the 150-day moving average (white line above), and this system gave two clear sell signals on National Beverage: one on October 17th, 2017, at $101.00, and the other at $105.00 in October of last year. While this stop strategy will not get one out near the highs, it will capture the meat of a move and will keep one on the right side of a trade and save them from giving back all of their profits.
Stops are a non-negotiable aspect of any trading strategy, as the market does not always make sense, and it does not always conform to what should happen based on a company's fundamentals. In a perfect world, National Beverage would have climbed to over $150.00 per share in Q4 2017, fueled by a strong overall market and earnings growth. However, the market is not a perfect world, and one needs a plan to deal with the outliers and to clue in on when the smart money is exiting a stock. This plan comes in the form of an exit strategy known as stop-losses, and one way to do this is by using a 150-day moving average. It is important to note that the 150-day moving average is useful for stocks in clear trends; it is a useless indicator prone to several whipsaws in stocks that have no trend. Stop-losses are not perfect, they are prone to whipsaws, and everyone's time frame is different. Regardless of that, I believe that stops are a must for every strategy, as even the best investors can get stuck with duds once in a while even when they should have worked based on the fundamentals.
Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.