- New Trades -


Kellogg Co. - K - close: $71.70

Comments:
10/25/15: K is another watch list candidate that has graduated to our active play list. The plan was to wait for shares to close in the $70.25-71.75 range and then buy calls the next morning.

K surged on Thursday with a big breakout past resistance at $70.00. The stock closed at $72.01. That was outside our suggested entry range. A little bit of profit taking on Friday left shares at $71.70. We will open positions on Monday morning (Oct. 26th).

K had some big news last week. Wall Street loves mergers and acquisitions. Lately the acquiring company has been rising on news of a deal. Word may have leaked early that K is in talks to buy Diamond Foods. This story didn't hit the wires until Friday but someone may have know about it the day before.

Diamond Foods (DMND), the maker of snack foods like Emerald Almonds and Kettle potato chips, is in late-stage talks to be acquired by Kellogg. Rumor has it the price tag could be in the $1.0 to $1.5 billion range. Shares of DMND soared +6.5% on Friday following this story.

FYI: K is scheduled to report earnings on November 3rd. More conservative investors may want to wait until after we see the market's reaction to K's earnings report before initiating long-term bullish positions.

Trade Description: October 11, 2015:
Shares of this giant consumer goods sector company are poised for a massive breakout higher.

If you are not familiar with K, here's a brief description: "At Kellogg Company (NYSE:K), we are driven to enrich and delight the world through foods and brands that matter. With 2014 sales of approximately $14.6 billion, Kellogg is the world's leading cereal company; second largest producer of cookies and crackers; a leading producer of savory snacks; and a leading North American frozen foods company. Every day, our well-loved brands nourish families so they can flourish and thrive. These brands include Kellogg's®, Keebler®, Special K®, Pringles®, Kellogg's Frosted Flakes®, Pop-Tarts®, Kellogg's Corn Flakes®, Rice Krispies®, Kashi®, Cheez-It®, Eggo®, Coco Pops®, Mini-Wheats®, and many more. To learn more about our responsible business leadership, foods that delight and how we strive to make a difference in our communities around the world."

At first glance you would think K's products are on the wrong side of the growing health food trend in the U.S. You would probably be correct. Consumption of breakfast cereals in the United States has been falling for the last five years. However, K is seeing impressive growth overseas, especially in emerging markets.

The downside to all this growth overseas is foreign currency headwinds. Negative FX trends have crimped K's revenue growth all year long. The company expects bearish foreign currency trends to shave off 9 cents a share in 2016 earnings. Fortunately it appears that investors are looking past the currency trouble.

The stock has been consolidating beneath major resistance at the $70.00 level for months. A breakout could spark the next major leg higher. Dividend investors should be drawn to K for its 2.8% yield. The point & figure chart is bullish and forecasting a long-term $92.00 target.

Tonight I am suggesting investors wait for K to close in the $70.25-71.75 range and buy calls the next morning with a stop loss at $64.75.

FYI: K's earnings are coming up on November 3rd. Cautious investors may want to wait and see how the market reacts to K's results before initiating new positions.

Investors should also note that the spreads on the 2017 calls are relatively wide. We may have to hold this trade several months before the spreads contract.

Breakout trigger: Wait for a close in the $70.25-71.75 range.
Then buy calls the next morning with a stop loss at $64.75

BUY the 2017 Jan $75 call (K170120C75) current ask $3.90

10/26/15 Trade begins
10/23/15 K dips into our suggested entry range, closes @ $71.70
10/22/15 K soars past our entry range (70.25-71.75) with a close at $72.01
Option Format: symbol-year-month-day-call-strike

Chart

Originally listed on the Watch List: 10/11/15