Shares of Hormel Foods Corp (NYSE:HRL) — maker of Spam and other branded meat and food products — fell around 9% Wednesday after it reported its latest earnings and announced it would buy nut-butter company Justin’s for $286 million.
Ever since Hormel stock topped out in February, it has started to look increasingly vulnerable, and Wednesday’s selling pressure helped HRL complete what’s at least an intermediate-term topping pattern.
Active investors and traders could look to play the stock from the short side on any oversold bounces.
Hormel’s first quarter included earnings of 40 cents per share, a penny above analyst estimates, on $2.3 billion in revenues, which was in line with estimates. HRL also went on to raise its fiscal 2016 outlook.
However, the purchase of Justin’s weighed on shares. Analysts I spoke with regarding Hormel stock on Wednesday showed mixed reactions, with some saying that the selling was a near-term overreaction, while others pointed to a stock that couldn’t rally despite an earnings beat and upped guidance.
Hormel Stock Charts
To gain some additional perspective, I’m looking at the charts of Hormel stock.
Not pretty.
On the multi-year weekly chart, note that at the end of 2012, Hormel was a $15 stock, which by February of this year rallied into the mid-$40s on a constantly steepening slope. All along, the stock’s yellow 50-week simple moving average held as support, which as a result of Wednesday’s selling pressure the stock has now fallen back to.
Through this lens, HRL may be somewhat oversold in the immediate term but as we will see on the next chart, the challenge for this stock may have just begun.
On the daily chart, you can see that HRL stock topped out in February after gapping higher . This was followed by a multiweek sideways consolidation phase and a gap-down in early April. Technical analysts would refer to this as an “island top” formation.
The stock then fell back to fell back to its January lows, rallied and with Wednesday’s selloff broke below the black horizontal, which is the so-called “neckline” of a bigger head-and-shoulders topping pattern (blue shapes).
Applying technical analysis 101 would ultimately call for Hormel stock to call into the high $20s in the intermediate term, or roughly another 15% from Wednesday’s close.
Active investors and traders could look to leg into short positions in the stock on any near-term oversold bounces.
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