Use the Stock Market's Irrationality to Your Advantage

Tuesday morning saw food wholesaler and distributor United Natural Foods report unequivocally great results as noted below. Management beat analyst estimates for both earning per share and revenues. It raised full-year guidance for fiscal 2022, which ends July 30, significantly. The initial share price reaction was what you'd have expected. UNFI quickly popped to as high as $49.56. Before long, though, UNFI had sunk to sub-$40 before bouncing back a bit. There was no rational explanation for that crazy volatility to the downside. It simply occurred. The next two graphics came from the analysts' call that took place later that morning. All major metrics improved significantly. Fiscal 2022 EPS guidance was raised to a mid-point of $4.78, up 9.88% from the previous quarter's guidance. Management under promised and over delivered. Since taking on its current form following the acquisition of SuperValu in the summer of 2018, UNFI's adjusted EPS have way more than doubled. Continuous shareholders more than quadrupled their money due to UNFI's extremely depressed starting price in June of 2019, three years ago. What is UNFI really worth? From 2012 through 2021 its average multiple ran about 18.6-times. Recent years were lower as uncertainty regarding the SuperValu move weighed on the shares. Those fears have been proven false. Sales and EPS are now much higher than they were before the acquisition. They appear on track to continue growing well into the future. Assign a middle-of-the-road 15 price-to-earnings to fiscal year-2023's new guidance and you come up with an attainable $78.75 target price by next summer. From UNFI's mid-afternoon quote that implies year-ahead upside of about 50%. That goal is not farfetched. UNFI changed hands at $49.90 to $83.90 during each of the seven years from 2012 through 2018 on EPS, which never exceeded $2.86. The company's CEO put over $121,000 of his money on the line on March 11 by purchasing 3,438 shares at an average cost of $35.21. He was taking advantage of another unwarranted retracement from last December's peak of nearly $58. There was no significant bad news of any kind during that period. Buying shares outright offers unlimited upside potential with no preset-time horizon. Option-minded traders can benefit from UNFI's high volatility by selling naked puts out to Jan. 19, 2024. Premiums were extremely juicy on Tuesday as shown below. Worst-case, forced purchase prices dropped to either $31.20, $33.50 or $35.70 depending on the strike prices employed. The two more conservative strikes offered potential entry points lower than the CEO's average cost on his March 2022 open market buys. Better still, owning UNFI below $34 would have been a winning position about 98% of the time over the most recent 52-weeks. Fundamentals have never been more favorable and the built-in margins of safety on the illustrated put sales ranged from 16.5% to 27.1% vs. the trade-inception price. Maximum gains, on these or any other option sales always equals keeping 100% of the premium dollars received up front. In these examples your largest gains would equal $880, $1,150 or $1,430 per each 100-share commitment. I just heard a CNBC spokesperson say that UNFI reversed course intraday due to increased working capital requirements. Management already noted that as a positive due to the expansion of their customer base. That is the very essence of what you want a growth company to be doing -- investing in the future to create ever larger profits. Take advantage of this week's irrational price action. Buy some UNFI shares, sell some puts or consider doing both.

Use the Stock Market's Irrationality to Your Advantage

Here's an example of this lesson with United Natural Foods, which just posted an earnings beat.

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