This one-time food stock is struggling now. How to trade it from here with options

Conagra Brands’ stock fell sharply this week after the packaged-food company reported quarterly earnings that fell well short of analysts’ expectations. We’ll discuss how to play it with options if this company is caught in a longer-term decline. Known for brands like Birds Eye frozen vegetables, Hebrew National hot dogs, and Reddi-Wip, Conagra (CAG) 8% to $30.08. For the fiscal first quarter ending August 25, Conagra posted an adjusted eps of 53 cents a share, missing estimates. Revenues of $2.79 billion also fell short of estimates. However, the company did reaffirm fiscal 2025 guidance, projecting adjusted earnings per share between $2.60 and $2.65, in line with analysts’ forecast. At first glance, Conagra’s PE (price-earnings) ratio of just over 11.5 times FY estimates likely looks relatively cheap, less than half the forward multiple of the S & P 500. However, the most significant institutional options trades weren’t betting on considerable upside. CAG YTD mountain Conagra, YTD Conagra traded eight times the average daily options volume, with puts outpacing calls. The two most active contracts were the January $30 puts and December $30 puts. It appears an institutional trader was purchasing the January $30 puts for an average of just over 1.41/contract and selling the December 30 puts at an average of just over 1.15 per contract or 26 cents net. At-the-money calendar spreads like this one are most profitable if the stock lands at the strike price on the expiration date. So is this, like Seinfeld, a “show about nothing”? Not precisely, because the longer-dated January options the institutional trader bought capture something other than Christmas and New Year’s, the shorter-dated December options the trader sold do not: the following earnings report, which Conagra will release in the first week of January. Many retail traders are tempted to sell options that capture events such as earnings because the premiums are often elevated, but there’s often good reason for that. If the company’s headwinds persist, we’ll find out in January. The packaged food business is a competitive one, and many consumers are feeling the pinch. The topline growth the company reported in recent years, mainly seen in quarters ended May, August, and November of 2020, was pandemic related (many stayed at home, as eating out declined, store-bought frozen and packaged food purchases shot up). Additionally, net income margins swung around significantly during 2020, exceeding 14% at one point, but the prior decade’s operating results illustrate that the historical average was considerably lower, closer to 8%. So if we assume the company revenues do not grow YoY (flat at ~ $12 billion), and we pick a net income margin closer to the long-term pre-pandemic average of 8% rather than the 10-11% the Street is anticipating that gets us to closer to $2 in adjusted EPS. That would represent 15 times forward earnings (with little to no topline growth). This more pessimistic assessment may be prompting a few of the “real money accounts” (a group that includes mutual funds companies, pensions, endowments, sovereign wealth, etc.) to be net sellers according to their 13Fs this year. For example, T Rowe Price sold 6.7 million shares in Q2. American Century has sold almost 2.1 million shares per their most recent filing. The trade A dividend yield of 4.65% and a 15 PE is tempting, even if the company is a bit of a value trap, but challenging environments rarely evaporate quickly. Considering those things, I think the institutional trader’s calendar put spread as a potential hedge against another bad quarter in January makes sense. One could consider using a diagonal, although with a lower strike longer-dated January $28 put and a higher $29 strike December because that would have no net outlay (in fact, during the trading day Wednesday, one would collect a credit for that trade). Trade example: Buy Jan. 17 $28 Put Sell Dec. 20 $29 put So the trade would be profitable on a modest decline and risks nothing if the shares should rally. DISCLOSURES: (None) All opinions expressed by the CNBC Pro contributors are solely their opinions and do not reflect the opinions of CNBC, NBC UNIVERSAL, their parent company or affiliates, and may have been previously disseminated by them on television, radio, internet or another medium. THE ABOVE CONTENT IS SUBJECT TO OUR TERMS AND CONDITIONS AND PRIVACY POLICY . THIS CONTENT IS PROVIDED FOR INFORMATIONAL PURPOSES ONLY AND DOES NOT CONSITUTE FINANCIAL, INVESTMENT, TAX OR LEGAL ADVICE OR A RECOMMENDATION TO BUY ANY SECURITY OR OTHER FINANCIAL ASSET. THE CONTENT IS GENERAL IN NATURE AND DOES NOT REFLECT ANY INDIVIDUAL’S UNIQUE PERSONAL CIRCUMSTANCES. THE ABOVE CONTENT MIGHT NOT BE SUITABLE FOR YOUR PARTICULAR CIRCUMSTANCES. BEFORE MAKING ANY FINANCIAL DECISIONS, YOU SHOULD STRONGLY CONSIDER SEEKING ADVICE FROM YOUR OWN FINANCIAL OR INVESTMENT ADVISOR. Click here for the full disclaimer.