Bears at the breakfast table?
10/10/17

As scavengers, bears will eat almost anything. Yesterday, they sat down at the breakfast table.

Makers of cereal have struggled along with other packaged-food companies as the Internet and millennials upend shopping patterns. Expectations for higher interest rates and faster economic growth may be other problems for the group, which are typically valued as “safe havens” in times of weakness – unlike what we have now.1 Just in case you were wondering why consumer-staples are the second-worst performing sector so far this year …

Case in point, Kellogg (NYSE: K). The iconic maker of brands like Corn Flakes, Froot Loops, and Rice Krispies is down 17 percent since January. But it’s not for lack of trying because the company is 3-for-3 on quarterly financials, beating expectations in February, May, and August.2 Rallies were short-lived after each, and on Monday some options traders looked for selling pressures to accelerate in the near term.

They went to work early in the Columbus Day session, amassing over 13,000 October 60 puts. The initial blocks priced for $0.20, with premiums then working their way up to $0.45 as the stock pushed lower.

Puts fix the price where a security can be sold, so they can make money to the downside. Using an average cost basis of $0.30 for this example, Monday’s contracts will break even if K drops 2.7 percent to $59.70 by expiration. They’ll double in value at $59.40 and triple at $59.10. But they’ll also go worthless if the stock holds above $60.

Kellogg (K) 1/6/17 - 10/9/17 chart

Source: OptionsHouse by E*TRADE.

K ended the session down 2.18 percent to $61.04, and has managed to remain above that psychologically important $60 level for almost three years. Earnings aren’t due until October 31, more than a week after the puts expire. That suggests the buyers weren’t exactly long-term investors looking for a hedge: More like fast-money bears playing short-term momentum … 

Management has tried to shake off the grizzlies by boosting margins and shifting to snacks, but some analysts caution K’s product suite is getting overlooked by younger consumers.3 Balance-sheet watchers may even start to worry about its $8 billion of debt if sales remain under pressure. 

By the way, overall options volume across the entire market was about half the monthly average yesterday because of Columbus Day. But it was more than 10 times the normal amount for options in K, with puts outnumbering calls by a bearish 14-to-1.

Bottom line: K has struggled along with other packaged-food companies this year, and yesterday some traders looked for the shares to remain under pressure.

 

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1. Ad Age: WPP WILL BARELY GROW THIS YEAR -- SORRELL POINTS TO PACKAGED-GOODS AS CULPRITS. 8/23/17. Marketwatch: Key yardstick of U.S. manufacturers hits highest level since 2004, ISM finds. 10/2/17.

2. Marketwatch: Kellogg adjusted profit rises above expectations. 2/9/17. Reuters: Kellogg's quarterly profit jumps nearly 50 pct. 5/4/17. Marketwatch: Kellogg shares edge up after earnings beat. 8/3/17.

3. CNBC: Kellogg can't get millennials to buy enough cereal, analyst says. 12/7/16. Benzinga: Cautious Call On Kellogg; Shares Downgraded On Risk To Shelf Space. 9/19/17. Bank of America Merrill Lynch: Snack transition progressing as planned; revenue declines remain a concern. 8/3/17.