Trade Alert: One Word … Plastics
Because we live in interesting times—perhaps even too interesting—I’m constantly on the prowl for the world’s most boring stocks.
And it doesn’t get much more boring than flexible and rigid plastic packaging.
Wisconsin-based Bemis (NYSE: BMS) makes packaging for the things people need and use every day. That covers everything from food and beverage to cleaning products to healthcare.
But the $4 billion company’s biggest edge is its specialized packaging for meat, cheese, and dairy products. To safely extend the shelf lives of these perishable products, not just any plastic will do. Bemis has developed films to address all the things that can happen to these goods that you don’t want to know about.
Despite its boring background, Bemis is a company in transition. Last year’s decline in earnings prompted management to take aggressive steps to reinvigorate the business through a $65 million company-wide cost-cutting and efficiency initiative. These moves are expected to help grow earnings per share by 17% this year.
There are some things, however, that management can’t control, such as the Brazil segment’s exposure to the country’s economic woes. This division’s contribution to operating income has roughly halved since 2015, to around 6.8% of segment earnings. The good news is that the situation there is reportedly stabilizing.
Bemis just reported earnings yesterday, delivering a moderate upside surprise on sales and earnings, while reaffirming full-year earnings guidance. The next earnings release isn’t scheduled until July 26. The put we’re selling today expires on July 20, which means this trade shouldn’t have any exposure to earnings-related surprises.
One other thing worth noting: Bemis has been the subject of takeover interest from at least two different companies over the past seven months. And late last year, it hired Goldman Sachs to help explore its options. In theory, that should help put a floor under the share price.
This trade will generate immediate income of $63 per contract now, with the possibility of buying Bemis at an 8.5% discount to where it currently trades if the stock gets put to you. Investors should set aside $4,000 per contract sold to buy the stock in case the option expires in the money.
Regardless of how many contracts you sell, it’s absolutely critical that you follow the instructions below, particularly when it comes to setting the limit order.
How to Make the Trade:
- Trade: Sell to open the July 20, 2018, $40 Put on BMS.
- Allocation: Sell one put for every 100 shares you would be pleased to buy at $40 per share.
- Current Stock Price: $43.70
- Limit Order Price: a credit of $0.63 or more.
- Tell your broker: “I want to sell a put on Bemis (NYSE: BMS) stock. Specifically, I want to ‘sell to open’ one July $40 Put for a credit of $0.63 per share or more.”
- Further Instructions Regarding the Trade:
- If the option price changes, you can adjust our recommended limit based on the midpoint of the bid/ask spread, which you should be able to see when entering the trade. Just make sure the potential credit is at least $0.63 per share or more.
- Place your limit order on a “good ‘til canceled” (GTC) basis and be patient.
The Win-Win Situation:
For every put contract you sell, you will collect $63 that’s yours to keep no matter what happens in the future.
If the put expires worthless, meaning the stock price is above $40 per share at expiration, then we’ll do another trade to create another instant payment.
If the stock is trading at or below the strike price upon the contract’s expiration, then you’ll be buying Bemis at an 8.5% discount to the current market price, while locking in a yield of 3.1%—plus the premium you pocketed when you sold the put.
Then we’ll collect the dividend while creating more instant payments by selling covered calls against the stock.