בס״ד

Hostess Inc. Gets Swallowed Like a Twinkie! (TWNK)

Posted on October 25, 2021

This week’s letter is dedicated to the memory of the Holy Tzaddik, Rav Meir David Kahane, HY”D ZTZ”L, whose yahrzeit fell yesterday.

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Our trade today is based on Hostess Brands, Inc. (NASDAQ:TWNK), makers of the iconic, edible petroleum-product known as the Twinkie (with a shelf-life of 21 years!).

Hostess, of course, offers a range of syrupy pseudo-foods geared to the graduate student/PhD cohort.  Among them:  Ding Dongs®, Donettes®, HoHos®, Baby Bundts and Zingers®.

Gotta love them academics.

Anyway, it’s the company’s stock that we’re trying to digest today.

And we start with the fundamentals:

  • P/E is a trans-fat 24.54,
  • NO dividend is offered, and
  • Price to Book is a reasonable 1.47.
  • That said, TWNK trails its fast-food competitors, with EPS down 7.90% on the year, and
  • Lower by 10.10% over the last 5 years.
  • To boot, insiders dumped 30% of their stock holdings over the last six months.

The lack of dividend ostensibly means the company is reinvesting profits back into the business.

But if so, we wonder why earnings continue to contract.

Could it be the business is growing stale?

We’ll certainly know more on November 3rd, when Q3 earnings are released.

But our guess is the selling will already have begun by then.

Have a look at the technicals –

This is the daily chart for the last six months, and it shows –

  1. RSI and MACD indicators diverging against price (in green).  This is consistent with reduced buying momentum.
  2. Indeed, over the same time frame, price has bumped up against resistance at $18.75 repeatedly (black line), while
  3. Volume has surged (in purple).  This looks like distribution to us – a great number of institutional and retail shareholders relinquishing their shares.  Hedge fund statistics for the latest period confirm the hypothesis.
  4. On the way to the top (a far-too-quick 24% climb in just six weeks), a gap opened at $16.20, which we believe will have to be filled (in blue).
  5. A simple Fibonacci retracement calculation suggests TWNK will decline to that same level (in orange).

Our trade for the day is designed to pay us handsomely for just such a drop.

And it looks like this –

A Jew and His Money recommends you consider selling the TWNK January 21st 17.50/20.00 CALL spread* for $1.05 (2.00/0.95), and buying the TWNK January 21st 20.00/17.50 PUT spread** for $1.50 (2.20/0.70).  Total debit on the trade is $0.45.

[*Sell the 17.50 CALL and buy the 20.00 CALL.  **Buy the 20.00 PUT and sell the 17.50 PUT.]

Rationale: the trade gives us a cheap entrée to a maximum NET profit of $2.05 (with just $0.45 laid out).  Consider multiple units, if you like.

That’s a 455% potential.

Max loss is $2.95 (difference between the CALL strikes plus the initial debit).

In order to swallow our full measure of winnings, we need to see a decline to $17.05.  The gap we alluded to above is at $16.20.  A decline to that level would provide all the creamy filling we’re after.

With kind regards,

Hugh L. O’Haynew

 

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