As COVID-19 Fears Empty Store Shelves of Cheerios, This Stock Has Become a Bargain
The selling continued for consumer staples companies on Monday as names like General Mills Inc (GIS) traded over 11.4% lower. It was only last week that they were trading at a 52-week high near $60, but the rout of the consumer staples sector has taken down even companies that appeared to be fairly strong.
On March 18, GIS announced earnings results that topped analyst estimates and the resulting analyst estimates weren’t materially changed since then. The price reaction to the earnings was more indecisive as the price formed a long-legged spinning top. The price is now retesting the 52-week lows and puts the current dividend yield at 4.15%.
While stores are often sold out of the types of products that GIS produces, the negative price movement seems to suggest that there might be supply issues. However, on Monday the company announced that its supply chain is working “effectively” despite the higher demand. According to their CEO, Jeffrey Harmening, “Importantly, our supply chain is operating effectively around the world, and we’ve been able to service the vast majority of customer demand to-date.”
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The price movement creates an interesting setup for short-term and long-term traders alike. This is created because of the high implied volatility of the options and the fact that this is a dividend paying stock. Traders are likely looking for a near-term bounce in the price and a commensurate drop in implied volatility. This allows them to generate quick profits. The long-term investor might use the sale of options as a means of acquiring this stock at a discount and a higher yield.
The 17 JUL 20 $42.50 put can be sold for around $3.50 a share. The obligation of that put sale is to buy 100 shares of GIS per contract at $42.50, for a breakeven purchase price of $39. That price is near its 10-year low and will provide a dividend yield of over 5%. Close it early if you can buy it back for $1.00 or less.