Tuesday, June 15, 2010

With a Name Like Smucker's … Buy Some Calls

Last week, we wrote bullishly about Del Monte Foods Company (NYSE:DLM), which issued a positive earnings report Thursday. The stock popped more than 6% on the day following the news, which turned a nice profit for those who bought the June call we recommended.
This week we're sticking with the food theme, focusing on The J.M. Smucker Company (NYSE: SJM), which reports Thursday before the open.
Known mostly for its jellies and jams, SJM offers products under a number of brand names, including Jif, Pillsbury, Crisco, Folgers and Borden. Hey, you have to love a company whose headquarters are at One Strawberry Lane in Orrville, Ohio. 
Analysts expect SJM to post a profit loss, the first in two years. That was also the last time the company missed an earnings estimate. In fact, SJM has failed to meet the Street's expectations just once in the past 13 quarters.
The stock usually does well after earnings, having gained ground after three of the past four reports. The average move the day after each report is a healthy 6%. Not bad for a tame food stock.
The chart shows the shares recovering after dropping around 13% from the April high. The $55 level has been a foundation of support for the past three weeks, helping the stock take out the 20-day moving average (blue line below). Next up is the 200-day (red line) near the $58 mark, which SJM should have no trouble scaling should it continue the recent string of post-earnings success. 
SJM Stock Chart - Earnings Trade
Sentiment toward SJM is mixed. The put/call ratio is dropping from a peak, suggesting buying pressurecoming from unwinding pessimism. Analysts are mostly aligned with the shares, although this hasn't changed in a while. So sentiment should not stand in the way of another post-earnings pop.
With June options expiring this week, it's best to play a July call. This should allow plenty of time for SJM to continue its recent uptrend.
The more conservative play is the SJM July 55 Call (SJM   100717C00055000), which has more than 60% of its premium in intrinsic value. The riskier play is the SJM July 60 Call (SJM   100717C00060000), which will require a gain of more than 5% to move into the money.  We believe SJM will eventually move that high, and a July option should allow that move time to happen.



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