Posted on November 4, 2020
This week’s A Jew and His Gold is brought to you by a 40 oz. Texas T-bone steak – fatty as they come (kosher slaughter, of course) – with marinade of your choice and an ice cold can of Schlitz to wash it down.
Ladies and gents, we believe in meat. And we have a feeling you do, too.
In fact, if we had to characterize this investment letter in its broadest terms, we’d call it ‘options con carne’, and we’d like you to recommend it to all your friends as such.
And so long as we’re talking about recommendations, here’s another one: we recommend you remain highly suspect of all who cross your path professing an anti-beef weltanschauung.
You’ll be glad you did.
We raise the issue of ingesting animal protein for the sole reason that today’s trade involves mid-cap agribiz Bunge Limited (NYSE:BG), St. Louis based marketers of NON-MEAT edibles since 1818.
And why have we decided to feast on them?
Aside from the technicals, which we’ll address in a moment, the company’s shares have soared 107% since the Batflu bottom and now sport –
And that something is earnings growth.
More specifically, BG’s EPS for the last five years is -39%.
In the last year, they’re down 833%.
And projections for next year see a decline of an additional 15%.
So where’s the proverbial beef?
Take a look now at the daily chart, and pay close attention to the lengthy overbought RSI reading in late October (in green) –
It doesn’t look good.
you have all the makings of a swift decline in the immediate offing.
And it’s for all the foregoing that we’re recommending the following action today on BG –
A Jew and His Gold recommends you consider selling the BG November 20th 55/60 CALL spread for $1.60 (2.60/1.00) and using the funds to purchase the BG November 20th 57.50 PUT for $3.10. Total debit on the trade is $1.50.
Rationale: because we expect BG stock to fall, and because we want to enter the cheapest trade possible to exploit that outcome, we’ve chosen to sell a CALL spread to purchase a PUT.
That gives us unlimited gain potential, while capping out any potential loss at just $6.60.
Because BG has remained strong in the face of general market weakness, we believe corrective action will come soon – if it comes at all – and be swift and sharp. Hence the selection of the near-term expiry.
Maximum loss on the trade occurs if BG closes above 60 at expiry.
Breakeven for the trade occurs at BG $55.50.
[Current price of the shares is $56.48.]
And our long PUT is already $1.02 in-the-money.
Many happy returns!