Last Call for BREW?

In Monday’s Guide we discussed the ‘Pump’ related to the Federal Reserve which should make the market attractive overall in the short term. While we think the market is still strong, there are some bearish tea leaves like the investor sentiment survey coming in bullish. So today we are going to take a look at an older Market Monitor pick that could be on the chopping block in the near future.

Last week both Citi and Sidoti downgraded Craft Brew Alliance (NASDAQ – BREW - $15.27) from BUY to NEUTRAL. The Citi notes stated that the main reason was valuation, as BREW is trading nearly 750x earnings. Is it time to sell or take some off the top, i.e. sip off the foam?

We highlighted BREW back in the middle of April and the stock is up nearly 105% since then!

If we look at BREW from our 3-tiered quick analysis method there are some mixed signals. There is no doubt the bears have come out in the short term as the DMA for the 5 and 20 day durations are bearish. However, longer term, the DMA turns bullish. Last week the stock reached a high of $17.56 and has come down to current price levels at relatively heavy volume over the last few trading sessions, with over 200,000 shares traded per on some days. Finally, forward valuation based on revenue and EPS puts BREW at FY P/E of nearly 60, which is definitely a sell signal. Additionally, the trailing 12-month gross and operational margins are 28% and 1%, well below the industry averages of 44% and 9% respectively.

On positive note, we are entering the holiday party season, which like retail, is usually a strong one for brewers and distillers. Secondly, 2014 revenue for BREW is expected to jump close to 10%.

We think it is time to take some profit here, especially since BREW has doubled in price since our coverage. Selling half your shares and holding on to the other half for a longer term is one suggestion to lock in some gains while holding on to the stock during this pullback.

Have a great day!

Disclosure: Goldman Small Cap Research analysts are neither long nor short these shares but may elect to purchase the stock within the next 48 hours.

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