Today, we’re recommending a bullish trade on Kellogg (K). The stock has been stabilizing quite nicely after bouncing off of support at $65, and we anticipate that it is ready to start climbing back up to its recent $69 high as it approaches its earnings announcement on Thursday, July 31, before the market opens.
K had a fantastic end of 2012 and early part of 2013, then pulled back a bit before starting to move up quite nicely for much of 2014 to date. We are anticipating that Kellogg could continue to see some back and forth, but it should have some general upwards pressure, especially since corn prices have dropped tremendously during the past couple of months.
Corn prices were increasing during the first part of the year, which did have an impact on K’s first-quarter earnings and expectations for what was to come in the rest of the year. So now that corn has made such a dramatic reversal downwards, we expect this trend to really free up some of the expense Kellogg faces, given that corn is a staple ingredient in K’s product lineup.
The shares dropped to their recent lows after General Mills (GIS) missed revenue and earnings expectations in June, but the plunging price of corn, K’s growing presence in the popular gluten-free market and the addition of 34 new products this past quarter should give K the boost it needs to meet expectations. We expect all of this to have a positive impact on Kellogg moving forward, especially with the upcoming earnings announcement. Plus, we can’t forget that analyst expectations have been pushed so low across the board this earnings season that the numbers aren’t as hard to beat as they once were.
We should note that there is potentially a head-and-shoulders pattern forming in K stock, so it looks like we could see some consolidation up into the July 31 earnings report. If Kellogg were to drop down through the $64.50 level, it would complete a bearish reversal pattern, and you’d definitely know at that point that it’d be time to get out of that trade.
But we’re anticipating that this potential price pattern is not going to be realized, that K will be able to recover, and that we should see it at least stabilizing before its earnings announcement. Then after earnings, we expect K to outperform and continue higher.
For those looking to trade Kellogg options, we are setting our recommended strike price at $67.50, as $67 has served as support and resistance during the past few months, but we wouldn’t be surprised to see K climb all the way back up to its June highs of $69.
‘Buy to open’ the K September 67.50 Calls (K140920C00067500) for a maximum price of $1.35.
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