Rebel Income Put Sale of the Week – ConAgra Brands Inc. (CAG)

  • CAG Current Price: $36.28
  • Put Sale: Sell the January Week 1 (expires 1/8/2021) $35 Put. 
    • Current Bid: $.65
  • Yield on committed capital: 1.85%
  • This trade expires in 17 days.

I hope everybody has fun plans with family and loved ones this holiday weekend! The season is different this year, of course; the need to stay safe and protected our loved ones is as pertinent now as it has been all year. Even so, I believe there is much to be grateful for and to celebrate as 2020 winds down and we start a new year next week.

This is the last trade I plan to post before the holiday, and for those of you that attend my Friday webinar, this is a reminder that this Friday’s webinar has been cancelled, but next week will be a bit different. The market will be closed this Friday for Christmas and next Friday for New Year’s Day, but next Friday we will be holding our Friday webinar as scheduled (democracy wins).

I’ve used CAG for a number of useful income-generating trades throughout the year, with my most recent trade expiring this last Friday. The stock is still hovering around the same level, which means it continues to offer approximately the same level of immediate income. The fundamentals remain solid, the value proposition is still attractive, and the income generation remains useful – which altogether provides more than enough reason to apply my lather-rinse-repeat method yet again.

Fundamental Profile for CAG

Conagra Brands, Inc., formerly ConAgra Foods, Inc., operates as a packaged food company. The Company operates through two segments: Consumer Foods and Commercial Foods. The Company sells branded and customized food products, as well as commercially branded foods. It also supplies vegetable, spice and grain products to a range of restaurants, foodservice operators and commercial customers. Conagra Foodservice offers products to restaurants, retailers, commercial customers and other foodservice suppliers. The Company also operates in the countries outside the United States, such as Canada and Mexico. The Company’s brands include Marie Callender’s, Healthy Choice, Slim Jim, Hebrew National, Orville Redenbacher’s, Peter Pan, Reddi-wip, PAM, Snack Pack, Banquet, Chef Boyardee, Egg Beaters, Rosarita, Fleischmann’s and Hunt’s. The Company sells its products in grocery, convenience, mass merchandise and club stores. CAG’s current market cap is $17.7 billion.

  • Dividend Yield: CAG pays an annual dividend of $1.10 per share – which the company increased from $.85 in the latest earnings call, and which translates to an annual yield that of about 3.06% at the stock’s current price. I’ve found it noteworthy to find stocks that have maintained their dividends under current economic conditions, which makes an increase in dividend payout even more rare and useful from a fundamental perspective.
  • Debt/Equity: CAG has a debt/equity ratio of 1.09. That number has declined steadily from 1.58 at the beginning of 2019, but the number remains high, a reflection of the reality that the company’s liquidity remains a question mark. In the last quarter Cash and liquid assets were $438.2 million – a decline from $553 million in the quarter prior, but still significantly above the $99 million registered two quarters ago, versus $8.9 billion in long-term debt. Most of that debt is attributable to CAG’s acquisition of Pinnacle Foods in the last quarter of 2018. The complexities associated with the transition of the two companies into one is part of the reason the stock struggled into the early part of 2019, but reports in the last three quarters indicate that the synergies the company has worked to achieve have been working. In the last year, long-term debt declined by a little over $2 billion, which is a positive, and is highlighted by a reduction in long-term debt over the last two quarters of about $750 million.
  • Earnings/Revenue Growth: Over the last twelve months, earnings increased about 63%, while Revenues rose by a little over 12%. Earnings and sales dropped in the last quarter – to -6.67% and -18.52%, respectively – but that doesn’t paint a complete picture of the company’s profitability, which is strengthening noticeably. The company’s margin profile over the last twelve months is healthy, with Net Income at 8.77% of Revenues over the past twelve months, and improving nicely in the last quarter to 12.28%.
  • Free Cash Flow: CAG’s free cash flow is healthy, and strengthening at about $1.53 billion. That marks a steady increase from $1.4 billion in the quarter prior, $905.9 million in the quarter before that, and $575.6 million at the beginning of 2019. The current number also translates to a useful Free Cash Flow Yield of about 8.37%.

Value Proposition for CAG

  • Current Price versus Historical Levels: At the beginning of September, CAG dropped back off of its 52-week high at around $39 to find new support at around $34 and push higher again to a peak in late October at around $38. The stock’s range has narrowed since then, with resistance now around $36 and support around $35. The 200-day moving average is right around $35 as we;;, which means that I think near-term downside in the stock is very limited and bolsters the rationale for income-generating trades right now.
  • Value Proposition: there are a lot of ways to measure how much a stock should be worth; but I like to work with a combination of Price/Book and Price/Cash Flow analysis. Together, these measurements provide a long-term, fair value target at nearly $47 per share. That means the stock is nicely undervalued, with about 23% upside from its current price.

As always, remember that by making this trade, I am saying that I would be happy to buy this stock at $35 per share. Based on the value information above, I think this is a very good price for a stock with solid fundamentals behind it. If the stock is below $35 at expiration, I will accept the assignment for those shares. If you don’t want to deal with a potential assignment from a put sale, you shouldn’t make this trade.

If you prefer to make this trade a little more conservative, you can also consider using the following Bull Put Spread trade instead of a straight put sale:

  • Put Sale Leg: Sell the January  Week 1 (expires 1/8) $35 Put. 
    • Current Bid: +$.65 (Credit)
  • Put Buy Leg: Buy the January Week 1 (expires 1/8) $32.50 Put.
    • Current Ask: -$.30 (Debit)
  • Net Credit: $.35
  • Yield on committed capital: 1% (14% annualized)
  • This trade expires in 17 days.

One of the big reasons I think a Bull Put spread could be smart for this stock right now is because with the long, $32.50 Put on the lower leg, there is a cap on how much downside you have on this trade. If the stock is below $32.50 at expiration, the maximum loss is $2.15 per share ($2.50 difference between $35 and $32.50, minus the $.35 premium brought in). That is true no matter how volatile the stock gets between now and then, or how far it drops. It also gives the stock some room to stabilize between its current price and $32.50, which is why you may consider simply accepting the assignment if it is between $35 and $32.50 at expiration; that could set up a useful opportunity to buy the stock at a great price and be in a useful, profitable position when the stock starts to move back to the upside.

If you would like to work with CAG but don’t want to sell a put option, or you aren’t approved for put selling, you may consider using the covered call trade below as an alternative. Please keep in mind that all pricing information displayed in this post is only current as of this writing; you will see different pricing from your broker.

  • Covered Call: buy the stock at its current price, then sell the January Week 1 (expires 1/8) 37 Call
    • Current Bid: $.85
  • Return, not called out: 2.34%
  • Called out return: 4.33%
  • This trade expires in 17 days.

If you are a new subscriber, please take some time to review the videos in the Getting Started area of the website. These will give you a pretty comprehensive view of the value-oriented approach I use to generate income with put selling and covered calls. You will also find it useful to read my Frequently Asked Questions article. Also feel free to review my previous posts as you’ll find additional answers to many of the questions you may have.

4 thoughts on “Rebel Income Put Sale of the Week – ConAgra Brands Inc. (CAG)”

    1. Hi John,

      As a general rule, I don’t avoid assignments from my put sales, so my intention is to hold the trade as is and accept the assignment. If you are in the trade and don’t want to be assigned at $35, you should buy your contract(s) back and absorb the loss to avoid the obligation of the put sale. As of now, the Ask price on the $35 Put is $1.20, so if you got the same $.75 that I did, that would translate to a manageable $.45 per share loss to close out before expiration.

      I hope this helps!

      Thomas

  1. Yes – thanks. I was not even thinking about possibility of assignment and simply holding the shares for a while until recovery – I was only thinking about loss on the option trade. Just FYI, I did the 32.5 / 35 spread that you described so my net credit was $.50 for 3 positions.

    Just to fill in you, here is how I have been playing it.
    a) Watching it today, I played 100 shares after the drop into recovery and made $50.00
    b) I sold one of 3 $35 credit spread positions for net loss of $50.00
    c) So got out of 1 at ~ break-even, leaving me 2 of 3 spread positions remaining.

    It does appear unlikely that the full spread value of -$250 would not be realized, so I will consider accepting put assignment of at least one position and hold for recovery. I will
    go back and read your original PUT Sell article on this.

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