Hormel Foods Stock Has Support in Place, Cheap Options

HRL has pulled back to a historically bullish trendline

Deputy Editor
Jun 10, 2020 at 2:37 PM
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The shares of Hormel Foods Corp (NYSE:HRL) nabbed a record high of $51.53 on march 18 while most of U.S. equities were selling off. Today, the company entered into an underwriting agreement according to the Securities and Exchange Commission (SEC), while Vice President James M. Splinter sold 40,000 shares of HRL, according to an SEC filing. As HRL continues to trade sideways as it has for the last two weeks, there's reason to believe this static price action could at the very least continue, and possibly lead to more upside.

More specifically, Hormel Foods stock pulled back to within one standard deviation of its 40-day moving average, following an extended period above the trendline. According to Schaeffer's Senior Quantitative Analyst Rocky White, five similar signals have occurred within the past three years, after which the equity averaged a one-week gain of 1.24%, with 80% of the returns positive positive. 

So at the very least, a move of similar magnitude from its current perch at $48 would mean more sideways trading for HRL. Longer term, the shares are up 14.6% in the last 12 months, yet there is pessimism abound among analysts and short sellers that could possible fuel a breakout.

HRL Chart June 10

As alluded to above, analysts have been advancing with caution. Of the seven brokerages in coverage, five rate it a tepid "hold," and there are zero "buy" ratings to be found. Plus, the 12-month consensus price target of $43.44 is a 9.5% discount to its current position. Meanwhile, short sellers are exiting at a noticeable rate. Short interest fell by 8% during the two most recent reporting periods to 26.56 million shares. Still, this represents a healthy 9.5% of HRL's total available float, so more pessimism could be unwound if shorts continue to exit the building.

Whatever the motivation, Hormel stock's Schaeffer’s Volatility Index (SVI) of 25% is higher than just 11% of all other readings from the past year. This means options players are pricing in relatively low volatility expectations at the moment.


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