Wednesday, May 30, 2012

BGS: A scribble chart

B&G Foods Inc. (BGS) makes packaged edibles -- the sort of stuff you find in the middle of the grocery store after breezing past the fresh and healthy foods that line the walls.

Among the well-known brands made by the Parsipanny, New Jersey company are Cream of Wheat cereals, Crock Pot seasonings, the Emeril's line of flavorings, and Grandma's Molasses.

BGS had the most bullish chart out of 16 higher-volume stocks selected from 31 ranked as buys by analyst consensus.

That BGS came out on top of my chart screening today is most likely a testament to the sad state of the market. Frankly, B&G's chart didn't have a lot of a great competition.

For most of the last six months, the BGS chart has resembled a monitor you would see in a hospital emergency room, with a lot of scribbling signifying movement, but little more, beyond a very slight downward trend. The six-month BGS chart basically tells me that the stock is alive and breathing, but little else.

That changed, maybe, on May 22, when the price began a rise from  $21.92 that has continued, with a tendency toward opening gaps, up to today's high of $23.68.

For those six trading days BGS has been up intra-day, and for five of them -- through Tuesday -- has opened above the prior day's close.

Today's trading marks the first stall in that rise. The price did indeed set a higher high, but then quickly retreated back into Tuesday's range (so far, at least).

I say that the recent uptrend "maybe" marks a change in the past months' pattern because it can also be interpreted as a continuation.

The stock is trading well within the range of the past six months. It will take a break above the Dec. 22, 2011 high of $24.64 before BGS can be analyzed as being decisively in an uptrend. That point is also an all-time high, so a decisively break above it would return BGS to blue-sky territory.

B&G Foods has return on equity of 23%, but at the cost of a punishing load of long-term debt amounting to three times equity.

Institutional ownership is a bit on the low side, at 61%, and the price is a bit on the high side, requiring $2.00 in shares to control a dollar in sales.

Earnings declined through 2011, while producing upside surprises each quarter. They moved higher in the first report of 2012, with a downside surprise, and higher still in the most recent quarter. No quarter saw a loss.

I like the return on equity but loathe the debt and am thoroughly puzzled by the earnings, which I would expect to be more constant. The fundamentals for B&G give me an impression of instability.

BGS on average trades 376,000 shares a day, which supports only a poor selection of options. Open interest, at the money, is quite high, and the bid/ask spreads aren't unreasonable. These options would be tradeable, although poor open interest at strikes away from the current price would limit my strategy choices.

Implied volatility is at the lower end of the six-month range and has been trading with a gentle rise for most of May. Options traders are pricing in a 68.2% chance that the stock will close between $21.05 and $25.85 a month from now, for a maximum gain or loss of 10%.

B&G Foods next publishes earnings on July 26. The stock goes ex-dividend on June 27 for a quarterly payout yielding 4.6% annualized.

I said above that the options are playable, but given the high dividend yield, the stock itself might make a better play. The share price is low enough to allow position sizing to fit most traders' rules.

Decision for my account: I'm troubled by the BGS financials, but in any case I wouldn't be entering into a long-term position. Not what I do. Uneasy though I am about the financials, the facts are that the company has been earning money consistently and getting a great return. 

If I were to play BGS, it would be as shares, with the possibility of augmenting my return by selling covered calls against them. The cautious trader would wait for a break above $24.64 before entering. Generally, I'm not that cautious.

However, I won't be trading BGS at this time for reasons intrinsic to my own account: My trading funds are fully committed.

I screened the stocks using a tourney bracket with a six-month daily chart and a five-year weekly chart. See my essay "10,000 Charts" for a discussion of my screening methods.

Tim Bovee, Private Trader tracks the analysis and trades of a private trader for his own accounts. Nothing in this blog constitutes a recommendation to buy or sell stocks, options or any other financial instrument. The only purpose of this blog is to provide education and entertainment.

No trader is ever 100 percent successful in his or her trades. Trading in the stock and option markets is risky and uncertain. Each trader must make trading decision decisions for his or her own account, and take responsibility for the consequences.

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