This Stock Looks Delicious at These Prices

Food distributor United Natural foods has been a pleasant surprise during the Covid-19-induced recession. People are cooking more meals at home than ever as most restaurants have been mandated to be closed, except for delivery and take out. Supermarkets and specialty food retailers -- UNFI's core customers-- have benefited by remaining open. Better still, hoarding of products contributed to higher than normal sales as folks stocked up on things in advance, to avoid running out. On Tuesday, UNFI reported better-than-expected adjusted results for its fiscal Q3 (ended Apr. 30, 2020). The company earned $1.40 per share in the quarter, while raising guidance for the fiscal year ending Aug. 1 to between $2.40 and $2.60. That compared favorably with Yahoo Finance's consensus views for $1.14 and $21.16 respectively. UNFI hit a new 52-week high of $23.38, just one day prior to the report. You would have thought the news would send the shares even higher. Instead, somewhat in inexplicably, UNFI was taking a beating on Wednesday. As of 1:01 p.m. it was quoted at $17.71, down 21.08% on the day. Wow. What is UNFI really worth, in light of management's newly revised guidance? UNFI's average price-to-earnings since 2010 ran about 21-times. Since 2016, it averaged 14.4-times current year's EPS. Assume just a 14-times forward multiple on fiscal 2021's estimate and it's logical to think the shares might regain $39 or better by the end of next summer. That goal is not far-fetched. UNFI topped out between $39 and $83 during each of the nine years stretching from 2010 right through 2018. Five of those years saw profits lower than are now expected for 2020, 2021 and beyond. Independent research house Morningstar does not have analyst coverage on UNFI. Its computer-generated present-day fair value estimate, though, sits at $33.03. Achieving that goal would deliver a greater than 86% gain from today's quote. Buying shares on this pullback could end up being enormously profitable. That is my preferred play right now. Two alternative ways to benefit from a rise would be selling Nov. 20, 2020 expiration date puts, or setting up a bull-call spread. Conservative put writing using UNFI's $15, $17.50, $20 or $22.50 strikes provided good upside with generous margins of safety. Selling a $15 put for $2.50 or so drops the if exercised' forced purchase price to just $12.50. That would represent a $5.82 per share discount to the $18.32 trade inception price shown below. UNFI could fall by up to 31.7% without causing a loss to the option writer. Bull call spreads are set up via purchase of a lower strike price call while shorting a higher-priced call option at the same time to lower your out of pocket cash outlay. It's appropriate if you're bullish on a stock, but don't want to commit a lot of actual dollars to the trade. The graphic below show the actual prices available as of 12:09 pm, with UNFI trading at $18.09. The balance sheet table below illustrates purchase of the Nov. 20, $17.50 call along with the sale of its $22.50 call for the same expiration day. The net cash outlay drops to just $165 per 100-share commitment as the $460 premium on the $17.50 call is reduced by the $295 received for selling the $22.50 call. Here are three of the most likely outcomes for this trade on expiration day depending on where UNFI actually closes at 4 p.m. If nothing goes as expected and UNFI finishes at $17.50 or less, you'd lose 100% of the money invested. $165 per 100-shares, though, would not be a major blow as part of a full portfolio. If UNFI rises to $20 by expiration day the following middle-of-the-road outcome would apply. An $85 gain per 100-share commitment might not seem exciting but it represents a very nice 51.5% percentage gain on the $165 net cash outlay. If done with 10 contracts instead of one, the up-front cash outlay would have been $1,650 and the net gain would be $850. If UNFI continues higher, to at least $22.50 by Nov. 20, as I think it will, the best-case scenario detailed below would play out. In that event the net profit would end up at $335 per 100-share commitment. That would be a terrific 203% gain on the original $165 net cash outlay. Any rise to above $22.50 by expiration day would be capped at that same number due to the sale of the $22.50 call as part of the initial transactions. A 10-lot of this bull call spread would produce a best-case, $3,350 net gain on an original $1,650 outlay. How cool is that? The bull call spread limited risk to just $1.65 per share while offering a legitimate chance at a greater than 200% profit. As always, there are many ways to play the same investment theme. In this case the theme is betting on a rise in the price of UNFI over time. For unlimited upside and no set time limit simply buy some shares. For limited risk and limited, but substantial profit potential, consider selling puts or setting up a bull spread.

This Stock Looks Delicious at These Prices

Here's how to play the irrational sell-off in United Natural Foods.

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