It's Time to Get Into the TreeHouse

TreeHouse Foods does over $4.3 billion in annual sales, yet is virtually unknown by most investors. A bolt-on acquisition has been approved and is now pending. Upon closing, it is expected to be immediately accretive to earnings. The company is planning to buy the majority of Ebro's Riviana Foods U.S.-branded pasta business for $242.5 million -- and it expects the transaction will be accretive by $0.20 to $0.30 per share in the first full year after closing. But THS has already proven to be an excellent trading vehicle. Its current downturn appears to be the fifth excellent buying opportunity presented since 2012. I last recommended THS here on Real Money Pro in November 2017, after it fell sharply, from north of $90 to about $43. My year-ahead trading target at that time was $56. Within two months THS had bounced back to above $50. Almost exactly 12-months after my write-up, the shares hit $55.60. Traders who held on until May 2019 could have sold for nearly $65. The firm is conservatively financed. THS shows well above-average earnings predictability. The trick to trading it has always been about buying when it's fallen out-of-favor and selling when the shares are popular. Last year, despite Covid-19, THS had solid EPS growth. This year appears poised to be even better, and that's before any positives from the previously mentioned acquisition. Value Line's analyst sees forward EPS hitting $2.95. Yahoo Finance's consensus view is for $3.03. From 2011 through 2020 THS typically commanded about 22.5-times its current year's estimate. At its Friday quote of $39.27 it was offered for just 13.3-times, a substantial discount to normal. It hasn't changed hands at that cheap a valuation in over a decade except at its very fleeting, March of 2020, panic low. That momentary nadir of $33.50 gave way to an early June rebound to $54. We're now lucky enough to get a second chance to buy back in below $40. Even a partial valuation reset to 20-times this year's most conservative estimate could send THS back to $59 by January 2022. That goal is far from an upper limit. TreeHouse carved out an all-time high north of $104 on similar EPS back in 2016. It peaked above $66 during eight of the previous 10 years. Yahoo Finance takes a more cautious view on THS, but still sees almost 37% upside within 12-months. I don't know about you, but I'd be satisfied if my entire portfolio delivers that magnitude return over the coming year. Its goal price appears very conservative. It assumes just a 17.7-times ending multiple rather than one, which is more in line with the stock's historical average. Every quarter in 2021 appears likely to register solid year over-year- improvement. Those kind of reports tend to make investors sit up and take notice. Higher earnings typically give rise to expanding multiples. Higher P/Es on higher per share numbers can send stocks surging. Option-savvy traders can pocket terrific returns on THS by setting up this very conservative Aug. 20, 2021 $40 buy/write combination. Actual pricing for the shares and options, with THS at $39.27, are displayed below. Buy/write combos involve buying at least 100-shares of the underlying stock, while shorting a covered call and a naked put, often using identical expiration dates and strike prices. The cash flow details of those trades are illustrated below. The holding period, if allowed to go all the way to expiration, was 217-days from the screen-shot taken on Jan. 15, 2021. When executed in a margin account, with enough free buying power to secure the put, the money received from the option sales can go towards paying for the shares purchased. On the trade's Aug. 20, 2021 expiration day there are just two possible outcomes. THS will either close at $40 or higher, or below $40. If the former situation plays out the best-case scenario shown below would unfold. Any upturn of at least 2.5% from the trade inception price would deliver a stellar 35.7% cash-on-cash return. That translates to an even more impressive 60% annualized. Outright buyers of THS at $39.27, who didn't employ the option sales, would need to see THS at $53.29 to achieve the same percentage gain. What if THS fails to reach and hold $40 on Aug. 20? In that case the worst-case scenario would be realized. Barring a major unexpected negative surprise, though, even that appears far from scary. Combination writers would end up with double-sized positions in THS, but at a very favorable average price of $34.74 per share. Future stock market action can never be guaranteed. We can know for sure, though, that owning THS at that level would have been a winning position in 119 of the stock's most recent 120-months (99.16% of the time). Unless you panic sold right at March's exact bottom, you'd already be way ahead if you were put at that moment. Odds like that are as good as it gets in the stock market. TreeHouse Foods looks like a fine stock to simply buy and hold for a while. Selling naked puts by themselves or setting up full buy/write combinations might do well, too, while also providing some downside protection.

It's Time to Get Into the TreeHouse

THS should begin to ... climb ... as acquisition is completed.

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