Sometimes we need to take a step back and take it easy with our trading, especially when the market is overly volatile like now it is now. We’ll still trade earnings, but now is not the time to go for the risky high-flyer. We can still realize a substantial gain using options, but add in a measure of safety. Less risk is something we could all use about now, no?
One stock that fits the bill is Del Monte Foods Company (NYSE: DLM), which reports fiscal Q4 earnings on Thursday. It’s certainly not going to get a lot of play on CNBC or the financial blogs. It won’t shove BP plc (NYSE: BP) or the euro or Apple Inc.’s (NASDAQ: AAPL) new iPhone off the front page. But that’s fine with us. We like stocks that fly under the radar.
Here’s what we really like about DLM: It typically beats the consensus earnings estimate … by a lot. Excluding September 2009 (when the actual number beat by 650%), the actual earnings number has bested the consensus by more than 50% on average over the past five quarters.
More importantly, DLM performs very well after these earnings beats. Over the past four quarters, the stock has gained an average of 6.8% the day following each earnings report. Now that doesn’t sound so boring, does it?
Currently, the shares are bouncing around just above the $14 level, which has provided solid support for the past three months. The 100-day moving average is also rising into this region, which could add another layer of support.
Sentiment toward DLM is also lending a hand. We’re seeing plenty of skepticism in the form of a spiking put/call ratio, rising short interest, and just four “buy” ratings from 11 covering analysts. That tells us that there’s plenty of buying power in reserve to boost DLM off the $14 level following another earnings beat.
To build in another measure of safety, we suggest playing the in-the-money DLM June 12.50 Call. The premium consists of nearly 90% intrinsic value (the amount the stock price exceeds the strike price), so the erosion of time value is not a concern. We prefer a June option since the expected move should happen within a few days of the earnings report at most. No sense in buying more time than you need with an option.
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