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Peanut Butter and Jam Flying Everywhere – Smucker’s Goes Spastic! (SJM)

Posted on February 11, 2021

Smuckers (NYSE:SJM) is more than just a jam company.

They’re a sticky-sweet sea of solidity in a market gone mad.

Let’s explain.

Smuckers is a fundamentally sound company that has not participated in the Batflu market hype of the last year.

Her stock has bounced about in a relatively tight range (see chart below), yet has grown under the radar as management made significant internal changes that should pay off shortly.

She’s also offered investors a reliable place to park funds while they reap a solid dividend and wait for a breakout.

And today, we want to suggest that that breakout is growing increasingly inevitable.

But before we get there, consider the numbers –

  • SJM trades with an earnings multiple of only 14.94 (TTM),
  • A Price to Book of just 1.54,
  • Offers a fat annual yield of 3.12% – almost unheard of in this market environment – and
  • Is growing earnings at 15.5% a year.
  • Moreover, the stock is now burdened by a sizeable short position (short float – 8.20%; short ratio – 8.53), that we believe will shortly be squeezed like a super-size jar of Jif Squeeze Creamy Peanut Butter – much to the economic (and gastronomic) benefit of shareholders.

Here’s the chart –

Technically, we have

  1. An essentially sideways moving stock, playing in a range between 105 and 120 (with a few, brief ventures beyond), best represented by the flatline action on RSI and MACD indicators (in green).
  2. The end of January, however, brought some big volume (in black), a development indicative of concerted shareholder action – and reaction – when
  3. The stock broke out of a four month pennant pattern (in red), only to receive a hammer head lower from shorts (in blue).

And now…

Only one group can win.

The stock is in play, and until we see a clear champion, the battle will rage.

But because it’s not important to us who prevails, we’re playing it thus –

A Jew and His Gold recommends you consider selling the SJM March 19th 105/125 strangle* for $2.05 (1.05/1.00) and buying the April 16th 105/125 strangle** for $5.55 (2.45/3.10).  Total debit on the trade is $3.50.

[*Sell 105 PUT and 125 CALL.  **Buy 105 PUT and 125 CALL.]

Rationale: the trade affords us a win should a breakout occur in either direction.

The short-dated short strangle helps pay for the longer-dated long strangle, allowing for additional profitability.

We will need a significant surge in either direction to succeed.

And the later the better.

Best case scenario sees the stock staying put until March expiry, then moving strongly in either direction.

Trade is ‘covered’, insofar as we’ve selected the same strikes for both strangles.  Many brokerages will not require margin for the trade.

Maximum loss is $3.50 (initial premium).

Maximum gain is theoretically unlimited.

Many happy returns,

Matt McAbby

 

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