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Why Monster Beverage Corporation Stock Jumped Today

By Anders Bylund - May 30, 2018 at 2:41PM

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Investors see the energy drink giant's large and swift share buyback actions as a strong vote of confidence by the company's own leadership.

What happened

Shares of Monster Beverage ( MNST 0.63% ) jumped as much as 6.8% higher on Wednesday following the energy drink maker's renewal and increase of an exhausted share buyback policy. As of 1:50 p.m. EDT, the stock had settled down to a 5.8% gain.

So what

Having used up the old $250 million share repurchase authorization, Monster's board of directors doubled up with a new $500 million policy. The previous buyback program was announced as recently as March 1, 2018. Looking one step further back, another $500 million plan was launched in 2015 and lasted all the way up to this spring.

Rising stock chart superimposed over digital map of the world

Image source: Getty Images.

Now what

If Monster immediately used up the new buyback program, the $500 million action would only retire roughly 2% of the company's outstanding stock. The market reaction today is about three times larger because Monster's leadership is signaling a firm conviction that its stock is undervalued and a great investment at current prices. Therefore, a rapid buyback program is seen as a good use of the company's own cash.

Due to a couple of disappointing earnings reports, the stock is trading just 9% above its 52-week lows today but 26% below yearly highs. Generous buybacks can make sense at these low prices, but only if management sees positive trends behind the scenes that could support a higher valuation. That's what investors are betting on today.

This article represents the opinion of the writer, who may disagree with the “official” recommendation position of a Motley Fool premium advisory service. We’re motley! Questioning an investing thesis – even one of our own – helps us all think critically about investing and make decisions that help us become smarter, happier, and richer.

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