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Wrap it Up: Quick and Dirty Speculative Roll on Graphic Packaging (GPK)

Posted on October 21, 2021

We waste no time!

The bats are falling, the people are waking and the criminal element will hang!

They don’t believe they’ll hang…

But they’ll hang.

Our trade for today is based on the Graphic Packaging Holding Company (NYSE:GPK), makers of coatings, laminates and paperboards to keep your store-bought poisons looking fresh.

They’d do better to fold their $6.2 billion operation (by market cap) and encourage you to buy from a local farmer.

But that’s neither here nor there…

The company’s fundamentals are not catastrophic, though it does carry too much debt, and hasn’t really earned much over the last while.

To wit –

  • P/E is 25.94 (high for a simple manufacturer),
  • Dividend Yield is 1.46%,
  • Price to Book is 3.33,
  • Debt/Equity is 2.06, and
  • EPS dropped by 14.70% this year, while
  • Q/Q Earnings growth was a negative 30.80%!

So why all the ruckus?

Why a better than 100% rise in the stock off the Batflu bottom last March?

How can a stock like this maintain a following?

Oyster-shucked if we know…

But we don’t believe it will last.

Earnings are set to be released next Tuesday (26 October), and analyst estimates are falling.

We ascribe to the lower end of those estimates and expect a surprise that snaps price lower – in the near-term, at least.

Take a look at the chart –

Technically, we highlight the following –

  1. We start with the daily RSI, which tickled the overbought 80 level at the beginning of September (in green), before moving sub-waterline bearish two weeks later.
  2. MACD followed suit two weeks hence, putting all technicians on alert: buying momentum was drying and the stock was weak.
  3. At the same time as the overbought RSI scrape, a bearish engulfing pattern (in blue) was registered at the highs.  A weekly bearish engulfing pattern was also registered at the same time (not seen here).  Taken together, we see good reason to believe that an intermediate-term trend reversal is now playing out.  And despite the latest move higher (which we see failing imminently) the downside trend remains in force.
  4. The latest, steep move higher left two gaps that need to be filled (circled, in red) on the way to a correction that we believe will carry to the $16.80 range – at first.
  5. A touch of the long-term MA (now at $16.12 and rising) could also ensue (in black).

And it’s for all the foregoing that we’re moving thus –

A Jew and His Gold recommends you consider selling the GPK November 19th 20/22.50 CALL spread* for $0.70 (0.90/0.20) and use the funds to buy the GPK December 17th 20 PUT for $0.75.  Total debit on the trade is a nickel.

[*Sell the 20 CALL and buy the 22.50 CALL.]

Rationale: first up, watch those expiries.  The trade affords us nearly everything we need to buy a December expiry PUT with a November CALL spread – a huge bonus.

We lay out a nickel for a theoretically maximum $20.44 gain (40,880%) – an eventuality we don’t see occurring, though it’s nice to stare at numbers that size.

Max loss is $2.55 – the difference between the CALL strikes plus the initial debit.

GPK has to fall just $0.54 before we start profiting.  That’s a mere 2.6%.

With faith and trust that the Master of Legions will destroy the criminal murderers among us swiftly, justly, mida-k’neged-mida.

Many happy returns!

Matt McAbby

 

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