January 7, 2015
'Supermarket to the World' Could
Make You 89% in Less Than 3 Months
By Jared Levy
Plummeting oil prices may have grabbed the most headlines in 2014, but across the board, commodity prices declined. And commodity-related stocks followed suit to the detriment of many traders.
Today's pick is positioned to exploit growing global food consumption no matter what happens to commodity prices. Shares rallied 18% in the final six months of 2014, as the price of corn, wheat and soybeans fell, but they still look cheap.
With a powerful chart pattern and chances of an upcoming earnings beat high, I think we can leverage a bullish move into nearly 90% profits in the next two and a half months.
Often referred to as the "Supermarket to the World," Archer-Daniels-Midland (NYSE: ADM) is one of the largest agricultural processors and food ingredient providers. The company converts crops, including corn, oilseeds, wheat and cocoa, into food and animal feed. It also converts them into chemical and energy products for use in construction, household goods, mining and packaging materials.
There's a good chance you've touched something today that was processed by Archer-Daniels-Midland. This diversity helps the company weather price fluctuations in commodities.
Additionally, ADM is a commodities trading firm, which means it has influence in the commodities market. This helps the company protect its margins and profit from price gyrations.
Growing Earnings, Great Value
ADM recently reported a 76% year-over-year jump in Q3 earnings despite lower revenues. The company is expected to grow earnings at an average of 18.8% a year over the next five years, while its forward price-to-earnings (P/E) ratio is 13.8. This gives ADM a PEG ratio of 0.73, signaling it is undervalued. Most analysts consider a PEG ratio of 1 to denote fair value (i.e., when the P/E ratio is equal to the earnings growth rate).
My proprietary earnings prediction algorithm, which examines analyst opinions, volume and options activity, shows a high likelihood that ADM will beat estimates when it reports fourth-quarter earnings on Feb. 3, as it has done in three of the past four quarters.
It helps that analysts have been conservative with their estimates for ADM given the commodity correction. This sets the bar fairly low and increases the odds of a beat.
On the chart below, we can see the large gap between 2015 EPS estimates and the stock's price. This tells me that the stock price hasn't "caught up" to earnings growth just yet. The bigger the gap between price and earnings, the more potential upside a stock has.
 Source: Zacks
In the past six trading days, shares have fallen 8% as traders ushered in the new year with a broad wave of selling. This provides us with a discounted entry point in a stock that remains in a bullish trend.
Since the sharp October correction, ADM has been building a wedge with resistance at $53.75. The bullish formation will remain intact as long as shares stay above the Dec. 17 low at $49.19.
Our first target is the top of the wedge at $53.75, which is 9% above current prices.
A wedge formation generally leads to a breakout of at least one times the weekly average true range (ATR). Adding the weekly ATR of $2.65 to $53.75 resistance, we get an upside target of $56.40, which is 15% above current prices.
We can leverage this move using a call option strategy into up to 89% profits. But given the current state of the market, I want to be cautious.
As I said, the wedge pattern could be negated at $49.19. Therefore, I want to see shares bounce from here before we enter a position. If that does not happen, we will wait for a better time to trade this stock.
ADM Call Option Trade
If we do get a bounce, I am interested in buying the ADM March 46 Call for a limit price of $5.50.
 Risk graph courtesy of tradeMONSTER.
This call option has a delta of 73, which means it will move roughly $0.73 for every dollar that ADM moves, but it costs a fraction of the price of the stock.
The trade breaks even at $51.50 ($46 strike price plus $5.50 options premium), which is 5% above current prices.
If ADM hits the initial $53.75 target, our call will be worth at least $7.75. When you enter the trade, place a good 'til cancelled (GTC) order to sell half of your position at that price.
We will ride out the remaining half of the position for the second target of $56.40, at which point our call will be worth $10.40.
The $49.19 level will function as our stop-loss. If ADM trades below it for two consecutive days and does not rally on the third day, we will exit the trade.
Recommended Trade Setup:
-- Buy ADM March 46 Calls at $5.50 or less
-- Set initial price target at $7.75 for a potential 41% gain in 2.5 months
-- Set secondary price target at $10.40 for a potential 89% gain in 2.5 months
Note: For the past year, we've been quietly piloting another call option strategy. So far, the results have been stunning. It has a 90% success rate and is producing average annualized gains of 86% per trade. Click here to get the next trade.
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