How low can a grocer go? Some traders seemed to be asking that question yesterday.
The industry has been beset by troubles on many fronts. It’s been squeezed by disruptors like Aldi’s, off-balanced by millennials, and forsaken by customers shunning traditional brick and mortar. So long Safeway, gobbled up by private equity in 2014. Hasta la vista, Whole Foods, now just another button on Amazon.com (NASDAQ: AMZN). Winn-Dixie, where have you gone?
That leaves Kroger (NYSE:KR) as the cheese that stands alone in the once-mighty group. But even it came under fire yesterday from options traders looking for its 22-month downtrend to continue. In the largest transaction across the entire market yesterday, a block of 24,398 April 21 puts was purchased for $1.85. An existing position in an equal number of October 21 puts was sold at the same time for $0.15.
Why would they grab one and dump the other? Here’s a likely explanation:
- Owning puts fixes the price where a security can be sold, so they can become more valuable when a stock goes lower.
- It looks like they began Wednesday’s session bracing for downside because they owned that massive slug of October 21 puts.
- But then KR jumped on news that management plans to divest its convenience-store operations.1 That not only slammed the value of the short-term puts, but it also gave momentum bears pause. “Maybe it will stabilize here,” you could almost hear some thinking. “Better do something about those puts!”
- So it looks like the trader bailed on the contracts expiring next week and shifted their capital into the spring. They paid a net $1.70 for those additional six months of downside exposure.
Source: OptionsHouse by E*TRADE.
KR gave back most of its gains, but still ended the session up 1.22 percent to $20.78. The company has taken hit after hit, banished from Goldman Sachs’ Conviction Buy list in March, gapping lower on weak guidance in June, and repeating the feat early last month.2 All told, it's lost half its value since the start of 2016 and is currently flirting with its lowest levels in almost three years.
Related names have received a similar treatment. Just ask Kellogg (NYSE: K). There’s also been plenty of selling in General Mills (NYSE: GIS), Hormel (NYSE: HRL), Dean Foods (NYSE: DF), and J.M. Smucker (NYSE: SJM).3 Many companies with many products, but analysts diagnose them all with pretty much the same ailments of stagnant volumes, weak pricing, and growing competition.
KR, by the way, reports earnings on November 30, so Wednesday’s contracts give exposure to that potential catalyst.
Bottom line: KR rebounded yesterday, but traders positioned for its longer-term downtrend to continue.
1. Bloomberg: Kroger Shares Jump After Company Eyes Sale of Convenience Stores. 10/11/17.
2. TheFly.com: Kroger downgraded to Buy from Conviction Buy at Goldman. 3/3/17. Marketwatch.com: Kroger shares sink after earnings guidance cut. 6/15/17. CNBC.com: Kroger's stock pummeled again as investors worry price war chipping away at profits. 9/8/17.
3. RTT News: Hormel Foods Cuts FY17 View As Q3 Misses Estimates; Buys Brazil's Ceratti Brand. 8/24/17. Marketwatch: JM Smucker shares fall 4% premarket after earnings miss. 8/24/17. Marketwatch: Dean Foods' shares fall 13% after Q2 earnings that were well below expectations. 8/8/17. Reuters: General Mills profit misses as U.S. yogurt sales sour. 9/20/17.