Schaeffer's Trading Floor Blog

Weekly Contrarian: Can Hain Celestial Group Continue Its Run Higher?

The bearish bias surrounding outperforming HAIN has bullish implications

by 11/29/2012 1:48 PM
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In a recent Barron's article entitled "Unnaturally Good", the author calls into question the sustainability of The Hain Celestial Group, Inc. (NASDAQ:HAIN). HAIN has had an impressive showing on both the fundamental and technical fronts, as natural and organic food products gain market share at grocery stores. In fact, the popularity of the HAIN brand has the stock trading at 28 times earnings and 17 times free cash flow. Plus, HAIN's string of sensible acquisitions and modest borrowing has helped to keep the company ahead of the pack.

However, the author expresses doubt that HAIN can keep the momentum going as competition grows. Additionally, the company recently acquired a U.K.-based line of sandwich and jam products that don't necessarily fall under the umbrella of "natural" or "organic" foodstuffs.

The author also hones in on the company's questionable accounting procedures, which make it difficult "to keep score of the returns on Hain's acquisitions." The author concludes that, "If Hain can't maintain true organic profit growth, its shares could settle to a more conventional earnings multiple below 20. That would cut the price by about a third and annoy a tough financial-health-conscious customer named Icahn Associates, which owns about 16% of Hain's shares."

Takeaway

HAIN's technical backdrop is nothing short of impressive. For starters, the stock has enjoyed a steady push higher by its 32-week moving average since October 2011. What's more, HAIN has surged 65.5% in 2011, including an earnings-induced bullish gap on Aug. 23, which resulted in a 19% pop on the day.

Despite this positive price action, sentiment remains doubtful toward the stock. In the options pits, the equity's 50-day International Securities Exchange (ISE)/Chicago Board Options Exchange (CBOE)/NASDAQ OMX PHLX (PHLX) put/call volume ratio of 0.46 ranks higher than 66% of other such annual readings. In other words, puts have been purchased over calls at an accelerated clip in recent months.

Even more telling of this put-skewed bias is the equity's Schaeffer's put/call open interest ratio (SOIR) of 1.13. This ratio ranks in the 99th percentile of its annual range, suggesting short-term speculators have been more put-heavy just 1% of the time within the past year.

This glass-half-empty approach has spilled outside of the options arena as well. Short sellers increased their bearish exposure by 5.6% during the last two reporting periods, and short interest now accounts for a lofty 14.4% of HAIN's available float. In fact, it would take over a week to cover these shorted shares, at the stock's average daily pace of trading.

With the bears having built up an ample amount of sideline cash, any upgrades from the unimpressed brokerage bunch could fuel a fresh wave of buying power. No fewer than five covering analysts still maintain a middling "hold" recommendation, leaving the door wide open for a round of ratings re-evaluations for HAIN. In other words, the stock could be prone to contrarian tailwinds, as these remaining skeptics begin to jump ship.


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