Three Little Bears in the Food Group
I’m feeling queasy over food stocks. A global slowdown in demand for processed goods and increasingly expensive acquisitions are weighing down profits. The small bump in growth provided by the expansion of food aisles in Target and Walmart has dissipated. Many have reached for growth via high priced acquisitions loading up their balance sheets with debt.
Each of these stocks trades with a price to earnings ratio (P/E) at least twice its earnings’ growth rate. Debt levels range from 88% of equity for McCormick to more than twice equity levels for Campbell.
Buy to open the May 19, 2017 put on Campbell Soup (NYSE: CPB) with a strike price of $57.50 at $1.38 or lower. Symbol (CPB170519P57.5)
Buy to open the July 21, 2017 put on Kroger (NYSE: KR) with a strike price of $27.50 at $1.03 or lower. Symbol (KR170721P27.5)
Buy to open the June 16,2017 put on McCormick (NYSE: MKC) with a strike price of $95 at $1.40 or lower. Symbol (MKC170616P95)
We have four events to look forward to that should support the bearish picture on these food stocks. Although we do not have an option position in Conagra, the company should offer more details on the tough operating environment. Conagra has been able to improve profits by selling off unprofitable lines, which is why I am not bearish on that particular stock.
March 21st: Kroger will present at an industry conference Telsey Group
About March 23: ConAgra will report third quarter earnings. Details to follow .
March 28:McCormick will report first quarter earnings. Details below.
April 3: McCormick will host an investor day.
Specific Stock Rationale:
Campbell just can’t escape the secular trend away from canned soup. Despite adding biscuit and snack products, revenue creeps downward each quarter. The company’s attempt to enter the fresh food market was marred by a recall and cost cutting is the company’s only route to growing profits.
Kroger is feeling the pain from the proliferation of choices for food purchases. Target, Walmart, drug stores food aisles and home delivery options are pulling demand away from their expensive to maintain stores. Debt has been issued to fund stock repurchases, a foolish choice for a company that may need that cash to build out stores.
McCormick’s numbers have been anything but spicy. Without acquisitions, revenue grew 1-2%. Recent acquisitions are all in the spice market, likely cannibalizing shelf space for its base products. Despite spending significant amounts of money to expand geographically McCormick’s earnings have been stuck in low gear.
Event Details:
What: McCormick first quarter call
When: March 28, 2017 8 a.m. EST
Where: ir.mccormick.com
Or: To listen to an audio replay, call 877-660-6853 in the United States or 201-612-7415 internationally. When prompted, enter the conference ID number 13656655. The replay will be available until 12:00 midnight Eastern time on April 18, 2017.
Listen for: How are McCormick’s sales doing versus the industry. Recently McCormick has lost market share and grown slower than the industry, has that gap narrowed?
How much revenue growth was organic and how much was due to pricing? Higher prices are expected to contribute 3% revenue growth and volume about 1.5%. Growth from pricing is not as sustainable as growth from volume.
Stock Talk
Phil Ash
Hi Linda (and PCA members),
I just made my first PCA trades! Skin in the game!
For anyone who doesn’t know me, I’m the president of Investing Daily.
For decades we’ve had an evolving employee policy to not trade in our own advice so as not to give the impression that we might be front-running any investments. Initially, the policy was to completely steer clear. Then we created a 30-day window to either side of an alert. And that eventually became a 2-day window. Regardless, most of us still just avoided getting in to avoid the appearance of any impropriety.
But over the past year, I’ve had many members across several of our services tell me that they would actually feel better knowing that management was investing right by their side. So ,here I am.
I’m primarily focused on options recommended by PCA and Jim Fink’s OFI…just one contract at a time. I’m not moving any markets. 🙂
Today, I’m in at:
CPB $1.40
KR $1.05
MKC $1.40
I paid a few cents more on two just to ensure I got in. When trading just one contract, the difference is negligible. Of course, Linda can (in her very kind way) tell me if I’m a fool or not.
BTW, I plan to do one contract on every option Linda recommends. I learned long ago that cherry-picking is a sucker’s bet.
Thanks for letting me join you all. Should be fun (and profitable). No pressure, Linda!
Derek: Las Vegas, NV
Nice to see you over here at PCA as well Phil. See you at the summit.
Derek
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Santo
Glad you picked these two to join. I did the same. KR alone paid for my wealth society membership almost 😉
Linda McDonough
If we had held them until today, they would have paid for a lot more! Now trading at $6.00. Thanks for the kind words.
Best,
Linda
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Derek: Las Vegas, NV
Hi Linda,
How do you feel about Jim Fink recently recommending MKC as a put credit spread with a neutral to slightly bullish take on the stock. I’m just curios as to your analysis compared to Jim’s because they seem to contradict each other.
Thanks!
Derek
Linda McDonough
Derek-
Hi there- Jim and I use totally different methodologies for our trades. Mine is based on a fundamental decline in MKC’s business. I believe Jim’s put spread is a bet on lower volatility in the stock.
Best,
Linda
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DR083157
Hi What is the plan for MKC today?
Linda McDonough
Unless the stock drops below $95, which is very unlikely, the puts will expire worthless. It is so frustrating to see the stock go up on baseless acquisition rumors only to have it fall on the day of expiration. Such is the nature of options. The Kroger puts which I felt like a hero selling yesterday for a 110% gain at $2.10 are now trading at $6.40- a more than tripling in less than a day.
Best,
Linda
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