בס״ד

The Simple Complexity of it All (SMPL)

Posted on February 20, 2020

In a demented world of fast-food gourmanderie, where everyone is sick and fat and lazy – but wants to be healthy and fit and bursting with energy and verve – along comes a clever company to sell us healthy junk food.

That’s right, healthy junk food.

Pay through the nose at the supermarket or your favorite health food store, rip open the rustic looking packaging, throw it back, and feel good that you’re chowing down on something that won’t kill you as fast as, say, a twinkie or a coke.

The company is (preciously) called Simply Good Foods Co. (NASDAQ:SMPL), and they debuted just three years ago via a merger between Conyers Park Acquisition Corp. and Atkins Nutritionals.  The goal is to assemble a set of winning brands that will cash in on the fat-to-fit-quick food market (closely aligned with the don’t-think-just-buy mentality of the average American).

Uh-oh!

But look out, fellow Jews, because this company trades with an earnings multiple of 76.1(!), pays no dividend and, in its latest earnings report, missed analyst revenue numbers and offered worse than expected guidance for 2020.

Smell like an old hankie?

Have a look at the daily chart for the last year –

The technical takeaway is as follows –

  • First, price is again approaching a major pivot at the $22 level (in red). This line has acted as a fulcrum from which the stock has been either repelled or reinforced for the last year.  Three times in just the last month it has bounced higher off that mark, but we believe the jig may now be up.
  • Both short term moving averages are rolling over (in blue), and price looks headed for a touch of its long term moving average at $22.
  • Moreover, both RSI and MACD indicators are sub-waterline weak (green boxes).

In short, it’s not clear how much will – or ammo – the SMPL bulls still possess.

A longer term view from the weekly chart is equally ominous –

This is two full years of weekly action, and it shows:

  1. An eighteen month trend channel (in red) that overshot on the upside and is now paying the price (in blue),
  2. A huge surge in volume that qualifies as distributive action (smart money bailing), and
  3. Weekly RSI dipping below its waterline just before New Year’s (in green), and failing a miracle, MACD about to confirm.
  4. Without a strong move above $25 on good volume, we believe things are about to get a little complicated for SMPL.

And we’re playing by selling a CALL spread and purchasing a PUT.

Like this –

A Jew and His Gold recommends you consider selling the SMPL August 21st 25 CALL for $2.05 and buying the SMPL August 21st 30 CALL for $0.95 (credit of $1.10).  With the proceeds, purchase the SMPL August 21st 22.50 PUT for $1.55.  Total debit on the trade is $0.45.

Maximum loss on the trade is $5.45.

Maximum gain is unlimited.

Many happy returns,

Matt McAbby

 

2 responses to “The Simple Complexity of it All (SMPL)”

  1. M T says:

    Awesome:
    22.5 Put Bought 1.48/Sold 3.90
    25 Call Sold 2.34/Bought 1.00
    30 Call Bought .91/Sold .40

    2.42+1.34-.51 = 3.25 per combo.

    I’m curious about the risk/reward profile of waiting vs. cashing out…any chance you could give a run down on time value?

    Thanks for this.

    • Matt McAbby says:

      Great news, M T!
      You came away anything but empty on this one! (Har, har…)
      A hearty congrats to you, and may you know many more.
      As to your question regarding waiting/bailing and time value, our feeling is that in a normally trending market that would be a legitimate question.
      But today, when we’re seeing daily moves of 8%, 9% and 10% on individual stocks, it doesn’t pay to enter into such a discussion.
      What you have in hand could be wiped out in a few hours with a FED or BOJ intervention, or some other unwelcome news.
      It’s not worth holding any short options positions (or spreads) in this environment unless they’re WAY, WAY OTM.
      Keep in touch, brother.
      And good on ya.
      Matt

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