July 1st, 2022

Frozen Potatoes and Profit

French fries and other frozen potato products rose to the top of an otherwise dim market this past quarter.  There is one stock that is benefiting from a robust foodservice recovery.  There is a company that is quietly up almost 30% in the last 3 months and up over 8% in the previous month.

What’s cooking?

As full-service restaurants and non-commercial enterprises like lodging, healthcare, schools, sports, and workplace environments came back online and increased in the number of customers, this one frozen potato company expanded its capacity and worked on revising its pricing structure to counter inflation, and it seems to be working for them.

Jefferies recently upgraded their stock from a Hold to a Buy with a price target somewhere between $84 -> $100/share.

This company has a 1.37% annual dividend and a beta of only 0.52.  If that wasn’t good enough, the P/E ratio is 44.58 but has a Forward P/E ratio of 25.31.  With these metrics, this may be a solid investment option.  

Which frozen potato company is heating up and ready to sizzle during earnings season?

Lamb Weston Holdings, Inc. (LW) is in the consumer defensive sector and is part of the packaged food industry.  They produce, distribute, and market value-add frozen potato products worldwide.  

Sales have been increasing for three of the past four years.

And its return on equity is higher than the industry average, which means it is able to effectively generate returns on the investment it receives from its shareholders.  

With how bad of a start of the year this has been, having a company that is not in the energy sector and still profitable seems a bit rare and worth adding to your watchlist.  

 

It’s currently trading around $71 and I’d like to see the $70 area act as support before looking to go long.  If you’re aggressive, you could look for a bounce off of $70 to start accumulating shares or you could wait for it to cross above the swing high of $74.  

You could sell puts for income, but this stock only has monthly expirations and a low implied volatility.  The 15 July 22 $70 puts are going for $1.20.

 

If the stock is on the move, you could buy a call option or try a call debit spread.  

 

Example of a debit spread:

Ticker: LW

Current Price: $71.46

Buy to Open 19 Aug 22 $70 call

Sell to Open 19 Aug 22 $75 call

Debit (max loss): $2.50 ($250) per contract

Break Even stock price: $72.50

Max Profit: $250 per contract

This is a 1:1 risk reward, defined risk trade (based on option prices after the close on 6/30/22).

 

As long as LW is above $72.50 by August 19, 2022, you will be profitable on the trade and if the stock is above $75 on that date, you will achieve the maximum profit.  You will have a maximum loss if the stock closes at $70 or below on that date.

 

Risk profile:

I hope everyone has a happy, safe, and reflective fourth of July break.  The markets are closed on Monday and I certainly hope that we can finish strong during the second half of the year.  Let’s get through the upcoming earning’s season and then maybe we will hit a bottom.

 

Happy trading! 

 

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Guest Writer, Filthy Rich, Dirt Poor

Editor, Wealthy Investor Society