After a sideways range between $100-$110 during the first half of 2018, McCormick (NYSE:MKC), a Fortune 1000 company by revenue, finally broke through $110 in early July and closed at $132.29 on Friday, Sept. 14. Despite the recent impressive run-up in the stock price, I expect the uptrend to continue and there are several long strategies in McCormick stock that could lead to impressive profits.
Headquartered in greater Baltimore area, MKC manufactures, markets and distributes food items that mostly serve as inputs, including spices, seasoning mixes and condiments, for the food industry. The most recent earnings call on June 28, like the one prior, delivered strong results on both the earnings and revenue front. Management credited the growth in the consumer business and flavor solutions segments as well as increased efficiency and benefits from tax reforms for the strength of the financial numbers. The balance sheet also showed that MKC’s acquisition of Reckitt Benckiser’s Food Division (RB Foods) in 2017 has so far been a profitable and robust play for the company.
The current dividend yield in McCormick stock is 1.7%. The previous ex-dividend date for MCK was July 6, 2018. Shareholders who purchased MKC before the ex-dividend date were eligible for the cash dividend payment that was made on July 23. The next ex-dividend date is expected to be in early October.
Within the food processing industry, peers and main competitors of MKC include Hormel Foods Corp (NYSE:HRL), International Flavors & Fragrances (NYSE:IFF), J. M. Smucker (NYSE:SJM), Kraft Heinz (NASDAQ:KHC) and Ingredion (NYSE:INGR). Analysts agree that with its steady cash flow, diverse set of global brands and pricing power, McCormick’s growth story both in the U.S. and internationally is likely to continue.
MKC stock’s 52-week range has been $93.70 (Nov. 7, 2017) — $132.35 (Sept. 14, 2018). Currently, moving averages are showing a strong trend with possibly higher prices ahead. Oscillators are giving overbought signals. However, in the case of a strong trend, a stock may remain overbought for a while, and the move can extend out further. Short-term support for SBUX is first at $131.3 and then at $129.8; meanwhile, short-term resistance in SBUX stock is first at $133.4 and then at $134.9.
If you are also of the opinion that McCormick still has room to go up, you may want to add MKC stock to your portfolio for further flavor. The first part of September has been especially good for McCormick stock. Therefore, a slight pullback might occur in the MKC stock price in the coming days and offer an even better entry point for investors. Depending on individual portfolio allocations and risk/return profiles, here are the three types of trades set up for McCormick (prices are based on MKC stock’s closing price of $132.29 on Sep.14):
Three Bullish Strategies on McCormick Stock
1. Buy 100 shares of MKC stock at a limit price of $132.29. You should expect to hold this long stock position for up to one to six months for an approximate 5-7% gain. You may consider placing a stop loss at about 3% below your entry point.
2. Use a covered call whereby you would buy 100 shares of MKC at a limit price of $132.29 and at the same time, sell a MKC Mar 2019 $130 call option, which currently trades at $8.60. The $130 option is slightly in-the-money (ITM), offering more downside protection in case of volatility and a decline in MKC stock.
This call option would stop trading on Mar. 15, 2019 and expire on Mar. 16.
Assuming you would enter this covered call trade at the closing prices on Friday, Sept. 14, at expiry, this trade would break even at a MKC stock price of $123.69, and the maximum return would be $631 at a price of $130 at expiry (excluding trading commissions and costs).
3. Sell a Mar 2019 $130 put option with a limit price of $7.32 — its closing price on Sept. 14.
This put option would also stop trading on Mar. 15, 2019 and expire on Mar. 16.
Assuming you would enter this put selling strategy at the closing prices on Friday, the upside is that you keep the premium as long as McCormick stock closes above $130, when March options expire (excluding trading commissions and costs).
The downside is that if MKC stock trades below $130 ahead of expiration, you could be assigned 100 shares for each sold put at a cost of $130 per share.
At expiry, this trade would breakeven at a MKC stock price of $122.68.
The Bottom Line on MKC Stock
I believe that the strength and uptrend in the McCormick stock price is likely to continue in the near-term and any slight pullback could be regarded as a better entry point. However, as prudent investors, it is always crucial to maintain a clear risk/return profile. Thus, if the stock price goes and stays below $120 in the coming weeks, the uptrend for now will have ended.
As of this writing, Tezcan Gecgil did not hold a position in any of the aforementioned securities.
