As Hillshire Brands Company (HSH) fades from its highs, it seems a bearish trade is in order.
Like many firms, HSH has been trending up on worsening fundamentals, which is a trend that’s unlikely to last in the third quarter. The last two earnings reports have been accompanied by selling, despite positive surprises, which indicates significant instability. HSH is particularly sensitive to agricultural prices, which have not been trending in the firm’s favor. As input costs rise, we expect this cost-cutting firm to issue very cautious forward-looking statements.
It is quite likely that the company has been kept artificially high on speculation that it will be acquired. This has been something investors have been looking for since the Sara Lee spinoff in 2012. Unfortunately, an acquisition hasn’t materialized and the stock’s price is looking extremely fragile, with the second highest earnings multiple in its industry. Bulls can be very fickle about a stock with poor fundamentals and worsening economic conditions. There is always a risk that the company will surprise investors positively, but the potential downside is much larger, giving this an attractive risk-to-reward ratio.
Recommendation: ‘Buy to open’ the HSH September 34 Puts (HSH130921P00034000) for a maximum price of $1.35.
InvestorPlace advisors John Jagerson and S. Wade Hansen are co-founders of LearningMarkets.com, as well as the co-editors of SlingShot Trader, a trading service designed to help you make options profits by trading the news. Get in on the next trade and get 1 free month today by clicking here.