Is it Time to Buy Hormel Foods Corp (HRL) Stock?

Hormel Foods Corp (HRL) is surrounded by pessimism despite longstanding technical strength

Jun 10, 2016 at 11:06 AM
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Hormel Foods Corp (NYSE:HRL) enjoyed an uptrend from late 2008 until February, when it hit a record high of $45.72. Since then, the shares have pulled back to their 60-week moving average -- a trendline that has served as support for nearly four years. This drop to a former technical springboard, combined with an overall pessimistic sentiment backdrop, suggests HRL could soon be headed higher on the charts.

HRL Weekly Chart June 10

Up 23% year-over-year despite the recent pullback, HRL has easily outperformed the broader market. Fundamentally, the company reported strong quarterly earnings in mid-May and simultaneously raised its full-year outlook. Yet all six analysts providing coverage on the stock maintain "hold" or worse ratings. A round of upgrades could propel the shares higher.

Short interest on the stock is also elevated, currently accounting for 9.5% of HRL's available float. At the equity's average pace of trading, it would take short sellers nearly nine sessions to cover their bearish bets -- plenty of buying power on the sidelines to fuel a HRL rally.

Pessimism has been rampant in the stock's options pits, as well. Over the past two weeks on the International Securities Exchange (ISE), Chicago Board Options Exchange (CBOE), and NASDAQ OMX PHLX (PHLX), traders have bought to open nearly three puts for each call. The resulting 10-day put/call volume ratio of 2.96 sits higher than 72% of all readings taken in the past year. 

This could also be a particularly appealing time to pick up HRL's near-term options, as premium is unusually inexpensive, judging by the stock's Schaeffer's Volatility Index (SVI) of 22% -- in the low 2nd percentile of its 12-month range. And with so much bearish sentiment toward this technical outperformer, it looks as though Hormel Foods Corp (NYSE:HRL), off just 0.3% today at $34.81, could have plenty of room to run.

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