Earnings season is definitely winding down, with next week sporting only about 20 S&P 500 reports. Retail has some big names on the list with Macy’s, Inc. (NYSE: M), Kohl’s Corporation (NYSE: KSS) , Nordstrom, Inc. (NYSE: JWN) and J.C. Penney Company, Inc. (NYSE: JCP)?. And there’s Cisco Systems, Inc. (NASDAQ: CSCO) with smooth-as-silk CEO John Chambers no doubt telling us the future looks bright.
Another area of interest next week is food companies, with SYSCO Corporation (NYSE: SYY)?, Tyson Foods, Inc. (NYSE: TSN)? and Sara Lee Corp. (NYSE: SLE) ?joining the party. Let’s take a closer look at Sara Lee, which reports before the open on Thursday, for an earnings trade. (Editor’s note: It was announced today that the company’s CEO, Brenda Barnes, is stepping down, but the news had little impact on the stock.)
The prevailing wisdom says that name-brand food makers such as SLE (Hillshire Farm, Jimmy Dean, Ball Park, etc.) are being hurt by cheaper store-brand items and deep discounting of pricier brands putting pressure on the bottom line. And that well may be true. But SLE has blown out the past few earnings reports and hasn’t missed an estimate in the past six quarters. More importantly, the shares have responded with solid gains after the past three reports.
Analysts clearly don’t believe in the stock, as just 1 of 10 rates the shares a “buy.” Perhaps this low-expectation environment is helping the stock after it beats the earnings estimates.
On the charts, the stock is enjoying a rally from the $14 level. The 20-day moving average has supported pullbacks within this ascent, including Friday’s drop.
The $15 level is key for this trade, as it turned the shares away in May, June and July. Peak August call and put open interest resides at the $15 strike, so there could be some stickiness there. But a strong earnings report should propel the stock beyond this congestion to its highest level in more than two years.
The fact that SLE has done well after recent earnings reports amid a skeptical sentiment background is a positive sign for Thursday’s report.
Buy the SLE Sept 15 Calls, which are currently priced at only a few cents more than the SLE Aug 15 Calls. That small difference is a cheap price to pay for an extra month’s worth of time.
Should the stock eventually break through the $15 strike (only about a percent away as of Friday’s close), this call should easily double in value.
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