A Rumor Boosts This Stock
Rumors are often among the most important drivers of stock market returns. A trader could see a large gain or loss when a major news source suggests that a buy out or some other kind of deal is possible. That was the case recently for a large company that has been struggling for the past few years.
The gap on the right side of the chart came after the New York Post published a story that began with, “There could soon be a line forming in front of Campbell’s HQ.”
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The newspaper is often a source of rumors in the stock market with its reporters seeming to be acutely tuned into the mergers and acquisition community.
This time, the reporter explained, “Campbell Soup, which last month said it was reviewing all aspects of its strategic plans and portfolio composition,” will have at least one deep-pocketed suitor interested in kicking the tires should it decide to put itself on the block, The Post has learned.
The suitor, Kraft Heinz, is very much interested in buying Campbell — and believes the soup maker’s management will start a sales process soon, a source close to the situation said.
The soup and snack company said it planned to discuss the outcome of the review in late August.
“They will likely put itself up for sale,” the source said.
“It could be splitting or selling the company,” a banker said. “It has got to be something that is meaningful.”
General Mills is also seen as a possible Campbell buyer, sources said.
Campbell, owner of Bolthouse Farms, Goldfish, Pepperidge Farm, Prego and Swanson, stumbled when in March it completed a $6.1 billion buyout of Snyder’s-Lance just as the consumer foods industry tanked.
Over the last six months, Campbell shares have fallen 21 percent, to $38.60, as of Friday’s close.
Campbell CEO Denise Morrison retired May 18, and the company is being run by a board director on an interim basis.
“There should have been a lot of consolidation in the food category and there has not been,” the source said.
“I won’t speculate on the outcome of the review, and as a matter of policy, we don’t comment on rumors or speculation,” a Campbell spokesman said.
Kraft Heinz declined comment.”
Rumors Can Lead News
In many cases, there will be leaks ahead of a news story. If a company like Kraft Heinz is serious about buying Campbell, or even if they are merely wondering if the deal could make sense, they would engage investment bankers and lawyers to assess the possibility.
There would also be internal meetings and a team would likely be formed to review the operations of both companies with an eye towards generating savings after a combination. In this case, there could be savings in the distribution systems of the companies since both deliver food to grocery stores.
If the potential for a deal is at all significant, it is likely Campbell would also engage investment bankers and lawyers and develop in house teams to conduct reviews of the potential process savings.
With all of this activity, leaks are possible.
The stock is now trading at the level it was at before the most recent earnings report which disappointed investors.
It could take time to determine if there’s a deal or not in the works and the stock is likely to hang on to at least part of its gains as that process unfolds.
Trading the Trend
When a stock is expected to move higher or pull back slightly, traders could consider obtaining long exposure to the stock to profit. A number of options strategies could be used to meet this objective.
Among those strategies is a bull put spread that could be used. The risk and reward diagram is shown below and it offers limited risk with limited potential gains. However, it is well suited for a stock which is in an up trend.
Source: The Options Industry Council
This strategy involves two put options. One put option is bought and a second put option with the same expiration date but with a lower exercise price is sold. Selling the put option will generate immediate income, just like the more familiar covered call strategy would. But, unlike a covered call, risk is limited.
Many traders will be familiar with the idea of a covered call. This is a conservative strategy many long term investors use to generate income in stocks they own that are unlikely to make large moves.
Although the bull put spread is different than a covered call, the bull put spread strategy meets the same objective as the covered call which is to generate some income. This trade generates immediate income and carries limited risk.
A Specific Trade for CPB
For CPB, a bull put spread could be opened with the July 20 put options. This trade can be opened by selling the July 20 $39 put option for about $0.55 and buying the July 20 $37 put for about $0.20.
This trade would result in a credit of $0.35, or $35 per contract since each contract covers 100 shares. That amount is also the maximum potential gain of the trade.
The maximum possible risk is the difference between the exercise prices of the two options less the premium received. For this trade, the difference between exercise prices is $2 ($39 – $37). This is multiplied by 100 since each contract covers 100 shares.
Subtracting the premium from that difference means, in dollar terms, the total risk on the trade is then $165 ($200 – $35).
The potential gain is about 21% of the amount of capital risked. This trade will be for about three weeks and the annualized rate of return provides a significant gain.
The bull put spread is an example of how options are a versatile tool and could meet many of your trading objectives. In this trade, options provide income and defined risk that could be lower than owning the stock. This strategy also has a high probability of success.
These are the type of strategies that are explained and used in TradingTips.com’s Options Insider service. To learn more about how options can be used to meet your goals, click here for details on Options Insider.