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The Skinny & Pale that Cannot Fail (SFM)

Posted on December 5, 2019

Back in April we posted a trade on the granola-eaters’ Mecca, Sprouts Farmers Market (NASDAQ:SFM), that grew into a meaty profit just 30 days hence.

Still not satisfied with the jing-a-ling space in our pocket, though, and hankering for some turmeric pepper quinoa and a whack of scoby fruit leather, we’re returning to the vegan lovers’ storefront for a second go round.

Sprouts Farmers Market is turning around.  The company has been growing earnings at an annual clip of better than 27% for the last five years, and despite some problems with its top brass, has been a smooth performer for years.

The dive in share price in the first half of this year was a confidence issue, centered around the shake-up in the C-suite more than anything material.  And it was by playing that dump as temporary that we came away like thieves back in the spring.

New Changes

As it turns out, the company has been rebuilding its board of late, adding another former Walmart maven to its BoD just as the stock is gathering momentum.

Before we get to the chart, though, know that we’re dealing here with an outfit on a serious growth trajectory that’s priced with reasonable fundamentals.

Consider – Price to earnings (ttm) is a not illogical 18.53, Price to Book is 4.24 and the company pays no dividend.

For a growth stock, there’s really little to fret about.

But now look at the chart –

Technically, there are a number of things to consider here:

  • First, after the market punished the company for the shake-up at the top, an oversold RSI indication was registered (at bottom, circled in red).
  • A bullish, positive divergence then ensued (in green), and
  • The stock has since moved higher in an ascending triangle formation (in blue), with overhead resistance slightly above the current share price of $20.10.
  • That line, incidentally (at roughly $20.50, in red), was formerly support for the shares as they were falling.  Now, as resistance, it’s turned back price twice in three months.

Today, shares of SFM are proving extraordinarily resilient.  Against a market that’s showing demonstrable weakness over the last week, shares of SFM are having none of it.  They’ve positively thrived.

Take a look –

There’s little about this stock that should worry a market bear.  Its niche and market share are strong, sustainable and growing.  And against the broader indices, it’s proving it can easily buck the tide.

And that’s why we believe the following action will prove profitable.

A Jew and His Gold recommends you consider buying the SFM June 19th 22.50 CALL for $1.00 and selling the SFM June 19th 17.50 PUT for $0.65.  Total debit on the trade is $0.35.

Many happy returns,

Matt McAbby

 

2 responses to “The Skinny & Pale that Cannot Fail (SFM)”

  1. Frank Humpert says:

    Hi Matt, Regarding the SEA trade…not that I am questioning the logic of it..(maybe I am … but only for my own education)…why are you using a call on STNG so far otm? Tangentially speaking, as you started to do, my great-uncle plied the seas from the 1910’s into the 1930’s and his yarns inspired my dad to join the Merchant Marine in WW II. I didn’t get the sea leg gene, though.

    • Matt McAbby says:

      Hey Frank,
      Thanks for writing.
      The Merchant Marine was probably the most dangerous place to be in WWII. Good on your dad for having the temerity and patriotism to risk his life for his country. Those guys went overseas mostly UNPROTECTED, as far as I can remember.
      As for the trade in question, the STNG CALL is far out-of-the-money because it’s short. We don’t want price to come anywhere near that $42 mark, as we sold it, essentially, to pay for the long SEA CALL.
      The SEA CALL, conversely, is deep ITM, a quality that will help it keep its value longer.
      As time begins to degrade the value of the STNG option, we’re betting that the difference in value between the two will grow, offering us a very nice profit on nothing spent.
      Hope that helps!
      Keep in touch.
      Matt
      p.s. Was your great uncle a Navy man? We’re proud landlubbers all, over here!

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