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Call Buying Spikes on ConAgra Foods Ahead of Earnings

By: Schaeffer's Investment Research
Posted: 12/20/2010 3:30:00 PM
Referenced Stocks: CAG;CBOE

While many traders are not expecting much from this holiday-shortened week on Wall Street, there are still a few heavy hitters left on the earnings docket. For instance, ConAgra Foods ( CAG ) will release its quarterly report ahead of the open tomorrow morning. Currently, analysts are expecting CAG to bank a profit of 45 cents per share, which is down about 14% from last year's profit of 52 cents per share for the same quarter. Historically, the company has performed poorly in the earnings limelight, missing the consensus estimate twice, matching Wall Street's outlook once, and topping expectations once in the prior four reporting periods. In fact, during the past year, CAG has missed the consensus estimate by an average of 1.6%.

Despite this poor fundamental track record, options traders appear to have high expectations for the company. Specifically, data from the International Securities Exchange (ISE) and Chicago Board Options Exchange ( CBOE ) indicates that a whopping 135 calls have been bought to open for every one put purchased during the prior two weeks. The resulting 10-day ISE/CBOE call/put volume ratio of 135.75 ranks above 96% of all those taken during the past year. In other words, speculative options traders have snatched up calls at a faster pace only 4% of the time during the prior 52 weeks.

With this added attention to calls, the bullish bandwagon is growing crowded in the options pits, as the Schaeffer's put/call open interest ratio (SOIR) of 0.56 indicates that calls nearly double puts among options with less than three months until expiration. This reading also arrives in the 29th percentile of its annual range.

At least some of this recent call buying bonanza could have been related to short sellers hedging their bearish bets. During the most recent reporting period, the number of CAG shares sold short soared by 22.6%. Despite this groundswell of pessimism, less than 2% of CAG's float is currently sold short, meaning that the short trade is far from overcrowded, thus placing the equity at risk for additional selling pressure.

Wall Street, meanwhile, is firmly in the bearish corner when it comes to CAG. Specifically, the equity has earned nine "holds," two "buys," and three "strong buys." What's more, Thomson Reuters reports that the 12-month consensus price target for the stock rests at $24.90 per share, a mere 10% premium to CAG's close on Friday. Should the company post solid quarterly results after the close, there is ample room for potential upgrades and/or price-target increases.

Turning to the stock's technical performance, CAG may deserve more bearish sentiment than is currently levied against it. The stock is currently sitting on a year-to-date loss of roughly 2.5%, and has underperformed the S&P 500 Index (SPX) by nearly 5% during the prior 60 trading days. What's more, the equity has stair-stepped steadily lower since peaking near $26.50 in March, creating a series of lower highs. CAG is currently in the process of pulling back from a trendline connecting these lower highs.

There is the potential for support to emerge near the $21 level, however. This area is home to CAG's 160-week moving average, and has provided a floor for the shares since early August. A pullback to this region would mean a nearly 6% plunge for the shares, which could net a tidy profit for bearish options traders. What's more, spread traders can potentially increase their return, and limit their losses, on a purchased put by simultaneously selling a put near support at $21.

Weekly chart of CAG since January 2010 with 10-week and 20-week moving averages