Campbell Soup: How to Identify A Post-Earnings Recovery

(This is an excerpt from an article I originally published on Seeking Alpha on March 2, 2014. Click here to read the entire piece.)

After Campbell Soup (CPB) experienced a nasty tumble following its November earnings report, I took a look at the stock as a potential buy for a post-earnings recovery. After reviewing the numbers, I concluded the stock was too expensive to warrant the risk. With some regret for dropping CPB from my radar, sprinkled with a generous helping of hindsight, I have learned some lessons about missing a post-earnings recovery. As it turned out, CPB made a perfect bottom after its post-earnings collapse and went on to print two buyable rallies. After reporting earnings on February 14th that reaffirmed guidance, CPB has printed a healthy 12% gain in just three months. This compares favorably to the S&P 500’s 3.2% gain over the same timeframe.


Campbell Soup recovers smartly from November's post-earnings collapse
Campbell Soup recovers smartly from November’s post-earnings collapse


Downgrade by major analyst fails to cause additional losses
Ironically, the biggest signal of a likely bottom came within days of my ill-timed piece on CPB. {snip}

Large options activity succeeds in moving the stock
Unusual options activity often turns into a false alarm. When this action DOES manage to move the underlying stock, traders and investors should pay close attention. {snip}

M&A rumors succeed in moving the stock
I never recommend buying into rumors. However, if M&A rumors surface within a larger bullish context (or even better, a good technical setup), I am all ears. {snip}

“Surviving” the earnings confrontation following a disaster
Buying into CPB ahead of its February earnings could have been justified by all of the above signals. On February 3rd, CPB took a sharp tumble yet sellers failed to follow-through. This was one last signal for buying CPB at cheaper prices. {snip}

Since the CPB miss, I have written on other post-earnings recoveries that have worked out. So, I have learned some lessons along the way. The main logic I use is as follows: in a bull market, and especially in an economy with positive momentum, companies with solid businesses but a stroke of “bad luck” or otherwise mistimed fortune, present discounted opportunities to play future price appreciation in the general stock market. If the stock market continues higher, a post-earnings recovery should deliver out-performance. If the general stock market takes a tumble, there is (hopefully) a good chance that the recovery stock already has bad news priced into it as a buffer for the pullback.


Be careful out there!

(This is an excerpt from an article I originally published on Seeking Alpha on March 2, 2014. Click here to read the entire piece.)

Full disclosure: no positions

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