Campbell Soup Company: Yet Another Consumer Staple With Extreme Bearish Sentiment (NYSE:CPB)


Over the last few weeks, I have come across a number of companies in the consumer staples sector that have extremely bearish sentiment indicators at this time. I came across the companies because the companies were reporting earnings. The latest one to get my attention is Campbell Soup Company (CPB). Campbell is set to report fiscal fourth-quarter results and full-year 2020 results on Thursday morning.

Analysts expect Campbell to earn $0.60 per share for the quarter and that is a 20% increase over the $0.50 per share the company earned in Q4 2019. Revenue is expected to come in at $2.03 billion and that is only slightly above the $2.02 billion in revenue for the same period of last year.

With the current health crisis that is ongoing, seeing that earnings are expected to increase isn’t a big surprise. I am surprised that revenue isn’t expected to jump as well. Campbell did see earnings jump by 57% in the third quarter and revenue jumped by 15% as consumers were forced to stay home and eat at home more.

Over the last three years, Campbell’s earnings have declined at a rate of 6% per year while revenue has increased by 4% per year. For fiscal 2020 as a whole, earnings are expected to show an increase of 28% while revenue is expected to decline by 5.7%.

Campbell’s management efficiency measurements are mixed. The return on equity is extremely high at 56.4%, but the profit margin is only average at 11.2%. The stock is currently trading with a trailing P/E of 32 and a forward P/E of 18.5. The trailing P/E seems a little high for a consumer staple stock, but the forward P/E seems more in line with the average stock. Campbell does pay a dividend and the current yield is 2.6%.

All in all, I would say Campbell’s fundamental indicators are above average. The earnings growth hasn’t been great over the last few years, but they jumped sharply last quarter and are expected to jump again this quarter. The ROE is extremely attractive and the profit margin is average.

The Stock has Been Trending Higher for the Last 18 Months

Campbell saw its stock become more volatile in February and March, but it maintained its upward trend. The weekly chart shows how the weekly lows from the last year and a half form an upwardly sloped trendline. The low in March did dip below the trendline, but that was an exceptional time period when panic was ruling the market.

The stock dropped down to the trendline back in mid-June and has since rallied. At that time, the trendline was sitting right on top of the 52-week moving average and now the trendline is slightly above the 52-week.

We see that the 10-week RSI and the weekly stochastic indicators are both in the upper half of their ranges, but neither of them are in overbought territory at this time. As far as the RSI is concerned, Campbell has spent very little time in overbought territory over the last three and a half years.

The moving averages are interesting for Campbell as the 13-week moving average crossed bearishly below the 52-week in April 2017 and that was the start of a decline that saw the stock drop from the $50 area all the way down below $31. The 13-week crossed back above the 52-week in a bullish manner in April 2019. That crossover was the beginning of a rally that saw the stock climb from $37 to its current level above $52. Watching these two trendlines might be a good strategy for long-term investors.

Two Out of Three Sentiment Indicators are Extremely Bearish

One of the things that jumped out at me the most for Campbell and ultimately helped me decide to write about the company was the sentiment toward the stock. The three sentiment indicators I look at show two with extreme signs of pessimism and one that is neutral.

The analysts’ ratings are one of those showing pessimism with only four out of 18 analysts rating the stock as a “buy”. There are 10 “hold” ratings and four “sell” ratings. This gives us a buy percentage of only 22.2% and that is well below the average buy percentage which is in the 65% to 75% range.

CPB Analysts Ratings.jpg

The short interest ratio is at 8.9 currently and that is extremely high for any company. It seems even higher when you consider how well Campbell has done fundamentally over the last few years and given the upward trend in the stock. The ratio jumped up from 7.7 in the most recent reporting period as the short interest increased from 17.42 million shares to 17.97 million.

The one sentiment indicator that is neutral is the put/call ratio. There are 16,269 puts open and 16,345 calls open at this time. This gives us a ratio of 0.995 and that is in the average range. The ratio is right in the average range compared to other stocks, but if we look at where it was back on June 3, it is considerably higher. June 3 was the last time Campbell reported earnings and the put/call ratio was skewed to the bullish side at 0.52. The fact that the ratio has been trending higher over the last three months indicates that option traders are becoming more pessimistic.

Overall, the sentiment outlook is pretty bearish, and from a contrarian perspective, that is a good thing. With so many analysts having the stock rated as a hold or a sell, the odds of an upgrade are much higher than a downgrade. With the short interest ratio being so high, short sellers can add buying pressure if the stock continues to rally.

My Overall Take on Campbell Soup

Campbell is more than just a soup company. Sure, that is what they are most known for, but they also own brands like Cape Cod, Lance crackers, Pepperidge Farms, and Prego. All of these brands should be doing well during the health crisis that is forcing consumers to eat at home more frequently.

Last week I wrote about Hormel (NYSE:HRL) and I echoed some of the same thoughts about it that I am making about Campbell. One thing I warned about Hormel was that I was concerned about its overbought status ahead of the earnings report and suggested that investors looking to add the stock to their portfolios should wait until it moved down a little. That isn’t the case with Campbell, at least not yet.

The fundamentals for Campbell are better and I am more optimistic on the stock. I think investors can buy the stock ahead of earnings and maintain the position as long as the 13-week moving average is above the 52-week moving average.

Another thing I said about Hormel that can also be said about Campbell is that it might not be all that sexy of a company, “but it provides goods that are pretty consistent with their demand. That aspect of the company can be a good thing to have in your portfolio if we see a prolonged economic downturn.”

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Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

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