After a difficult 2018, investors may consider adding Tyson Foods (NYSE:TSN) stock to their portfolio for the rest of the year. There are several long strategies in TSN stock that could lead to impressive profits.
On Aug. 6, TSN did not paint a rosey picture when it reported Q3 earnings. Management of the global meat-packing giant cited increased costs and tariffs that negatively influenced chicken and pork prices as a primary issue the company must endure in the near-term. In the recent trade wars saga, China, the global top consumer of pork and one of the biggest markets for U.S. pork, introduced a 25% tariff on pork imported from the U.S. Previous 2018 earnings calls by TSN management had also been downbeat and investors in Tyson Foods stock had punished the stock throughout the year.
Packaged foods and meats, as well as agricultural products make up the food products industry. Within the meat products sector, TSN’s main competitors include Hormel Foods (NYSE:HRL), Industrias Bachoco (NYSE:IBA), Pilgrim’s Pride (NASDAQ:PPC) and Sanderson Foods (NASDAQ:SAFM).
Rising commodity prices that serve as inputs (i.e., beef, pork, poultry and animal feed such as corn and soybean) to the sector has been a major financial concern for the group as a whole, and these problems have ultimately led to TSN’s shrinking margins. However, this mature industry is mostly non-cyclical and immune from market downturns.
The price-to-earnings ratio, which is typically considered a powerful tool for valuation purposes, of Tyson Foods is currently quite low at about 8; in comparison, the industry currently trades at about 19. The current dividend yield in TSN stock is almost 2%. To many investors, the stable dividend coupled with this low P/E ratio would make TSN stock a value play.
TSN stock’s 52-week range has been $56.79 (July 31, 2018) — $84.65 (Dec. 4, 2017). Its technical chart has been in a stabilization and recovery phase since early August. Furthermore, the Tyson Foods stock price has recently crossed over the 50-day moving average of $62.7, helping improve the technical picture. Short-term support for Tyson Foods is first at $61.5 and then at $60; meanwhile, short-term resistance in TSN stock is first at $66.7 and then at $69.5.
Despite the tariff war worries and potential loss of market-share in China, TSN stock is likely to benefit from a growing global appetite for protein-packaged foods, including beef, poultry and pork. If you are also of the opinion that the downtrend in TSN stock is coming to an end, you may want to add Tyson Foods to your portfolio to serve up fresh profits.
The first part of September has been especially good for stock in Tyson Foods. The stock has closed up in five of the last six days. Therefore, a slight pull back might occur in the TSN stock price next week and offer an even more appealing entry point for investors. Depending on individual portfolio allocations and risk/return profiles, here are the three types of trades set up for Tyson Foods (prices are based on TSN stock’s closing price of $63.50 on Sep. 13):
Three Bullish Strategies on Tyson Foods Stock
1. Buy 100 shares of Tyson Foods stock at a limit price of $63.50. You should expect to hold this long stock position for up to one to six months for an approximate 8-10% 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 TSN at a limit price of $63.50 and at the same time, sell a TSN Jan 2019 $62.50 call option, which currently trades at $4. The $62.50 option is slightly in-the-money (ITM), offering more downside protection in case of further volatility and decline in TSN stock.
This call option would stop trading on Jan. 18, 2019 and expire on Jan. 19.
Assuming you would enter this covered call trade at the closing prices on Thursday, Sept. 13, at expiry, this trade would break even at a TSN stock price of $59.50, and the maximum return would be $300 at a price of $62.5 at expiry (excluding trading commissions and costs).
3. Sell a Jan 2019 $62.50 put option with a limit price of $2.63 — its closing price on Sept. 13.
This put option would also stop trading on Jan. 18, 2019 and expire on Jan. 19.
Assuming you would enter this put selling strategy at the closing prices on Thursday, the upside is that you keep the premium as long as Tyson Foods stock closes above $62.5 when January options expire (excluding trading commissions and costs).
The downside is that if TSN stock trades below $62.5 ahead of expiration, you could be assigned 100 shares for each sold put at a cost of $62.5 per share.
At expiry, this trade would breakeven at a TSN stock price of $59.85.
The Bottom Line on TSN Stock
I believe a rebound in the Tyson Foods stock price is coming. However, as prudent investors, it is always crucial to maintain a clear risk/return profile. Thus, if the rebound does not happen, another down leg toward the mid-$50’s level could continue in the near future.
As of this writing, Tezcan Gecgil did not hold a position in any of the aforementioned securities.
