By Warren Kaplan
The Stock Option Writer
© Warren Kaplan 2011-2017
September 26, 2017
I admit that I like to buy stocks in companies that I can understand. I was scouring thousands of stocks because my cash position is at a record high by an amount and percentage point of view. I was recently called away on the bulk of a large position the family had in NLY at a great profit due to the premiums we had gotten by writing call options above the market price, the dividends we received and the capital gains we recently made. We continue to put small amounts of money into certain ETFs but due to the recent market highs, we continue to wait for a major pull back.
That said, we are looking for individual situations. We are still very long Carnival Cruise Line (CCL) and we think the stock will hit $100+ a share in 4 years as well as increase its dividends. I think it is reasonable to project $150 - $200 a share in 10 years based on growth of revenue, earnings and dividends.
Back to JM Smucker. The stock price was $104.59 on Friday, Sept. 22, 2017. The all-time high was reached last year at $156.23. The company has strong famous consumer brands such as its world-famous jellies and peanut butter (Jif). Did you know that they also make and sell Folgers coffee, Dunkin' Donuts packaged coffee, Millstone K-Cup products, and Rowland Coffee? K-Cup continues to be a fast-growing business.
Add to these fine products is Crisco and Pillsbury as additional brand names.
This may surprise you. SJM is in the pet foods business and sells under the brand names Meow Mix, Milk-Bone, Kibbles n' Bits, Natural Balance, 9Lives and Pup-Peroni. Everyone knows that the pet industry is a growing business so you know that SJM will continue to add growth in that category. This is not rocket science. This company is good steady growth induced by smart marketing and a powerful sales distribution system in place.
The company is smartly continuing to pay down debt and to take time to digest and integrate acquisitions.
With 16 years of continual yearly dividend increases, in only 4 more years, it could be included in the SDY ETF. The SDY consists of companies picked from the S&P 1500 that have raised their dividend for at least 20 years. Even now, there are dividend ETFs and Mutual Funds that seek increasing dividends and growth that have first begun to add SJM to its portfolio.
Let’s look at the charts: The blue line is a 50-day moving average and the red line is a 200-day moving average.
The technicals look terrible. That is great. You can review the company’s earnings and decide on the P:E ratio you are comfortable with. Then, you just write a put option that encompasses that price. For example, would you be willing to buy 100 shares at say $100 a share? That would be a new low price for the past 12-months. The $100.00 price is a decline of 36.00% from its high.
Well, here are some ideas for setting up a position or a potential position in J M Smucker.
Write the $100 put option ending October 20, 2017 and take in a premium of roughly $.55 per share. IF you get put, your cost is $99.45 per share and I expect the stock to go ex-dividend around November 9, 2017 for $.78 a share. If instead you sold the November 17, 2017 $100 put, you should receive about $1.60. That premium reduces your cost to $98.40 per share. If you have an investment account rather than a trading margin account, you can consider the April 2018 $100 put and take in about $4.10 per share. That amount is greater than what you would have received in dividends if you bought the stock and held it for one year. April 2018 is only 7 months away. If you did get assigned, you would own the stock at $95.90 and the dividend should be increased again next year.
You have to make up your mind as to the direction of the stock. Your opinion is as good as anyone else. You can consider buying the stock now and selling the short term $105 call. You can sell the November 17, 2017 call at $105 and take in $2.95 a share. Since I expect the ex-dividend date to be around November 9th, IF the stock is above the $105 price, it will probably be called the day before and you would end your delivery-on-call obligation 8-days early. IF the stock is at $104.99 or lower, you will not be called and you will get the dividend. Your obligation to deliver 100 shares of SJM at $105 ends November 17, 2017. Then you can write a fresh call on your shares and take in more premium and more dividends. The January 19, 2018 call at $105, will bring you a premium of $4.00. If you are working with a professional investor advisor, that person should be able to work out a plan for you. If they do not understand options, then fire them because you are being underserved.
In my opinion, at this time, SJM looks technically weak. You can expect the stock price to continue to decline and that is to the advantage of an investor who has a longer-term outlook. You can even consider this stock to be accumulated by use of a DRIP.
When you are in a grocery store, look for SJM products. Every purchase helps your company.
Warren Kaplan has been writing options for 50 years. He has been a stockbroker, investment banker and brokerage owner. He currently owns and operates Kaplan Asset Management, a provider of financial assistance for small to middle market businesses. He has more than a half-century of experience in dealing with financial markets, giving guidance and consulting with management, and assisting in the development of business strategies and solutions. The Company has assisted and consulted many successful companies, such as Natures Bounty (NBTY) and Action Products International (APII), helping them to go public and trade on the NASDAQ stock exchange. His philosophy is to “do something with the profits.” “If you make $100 in the stock market, take 50 percent and invest it back into the market. Then, take the other 50 percent and buy yourself something.”
Additional disclosure: I am not a registered investment adviser and I do not give investment advice. Nothing in this article should be construed as investment advice. Investors are encouraged to do their own research and seek the advice of an investment professional before investing. Writing options is not for everyone. This article was written for informational purposes only.