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Investing.....Let's Go Krogering

Updated on March 7, 2015

Fiscal Cliff Provides Option Opportunities

by Robb Hoff

December 21, 2012

While we watch the fiscal cliff debacle in the nation's capital deteriorate into its most comedic and flagrant testament of political retardation yet, we also have to swallow the volatility of financial markets as they lurch to the verge of making all of us barf.

But just the verge.

The ultimate demise of economic recovery -- including the bull market for stocks that has surged since the collapse of 2008 -- won't likely be triggered by any of the Bevis & Butthead political posturing we currently are force fed.

As such, the signal going off in every investing head should be flashing the buy sign, but the question, as it always is, seems to be one of timing -- which is why options are there to help take some of the guesswork out of timing with minimal risk.

One stock I covet is Kroger. But I have sticker shock, and have watched the stock from a distance ever since it closed at its 52-week low in July at $21.11. In retrospect, that would have been the time to buy a chunk because the stock since then has bumped along its 52-week high ceiling and now currently is priced at $26.48 per share.

Kroger is a dynamic grocery supermarket that has successfully integrated gasoline sales into its retail offering for its discerning customers with the advantage of extending fairly deep fuel discounts for those customers who participate at the pump. The company has adopted this model throughout its operations in the country under different names than Kroger to the extent that actual Kroger stores are only a percentage of the operation base.

For me Kroger will always be primarily Kroger and investing sentiment aside, I'll always wax nostalgic for the role Kroger played during my childhood in Cincinnati when it served as my depot for returning the glass soft drink bottles I would scavenge so that I could use the deposit cash to fund my appetite for baseball cards. Kroger was and is a landmark and fixture so integral to daily life that its culturally entrenched for many people with ties to Cincinnati, where Kroger remains headquartered.

It was also a great place to buy some of my favorites snacks to eat -- Twinkies, King Dons, Ding Dongs, Ho Ho's and Golden Cupcakes -- which brings me to the cream filling in all of this (the stock options).

Kroger on its own has a rather ripe valuation but deservedly so. An economic downturn would undoubtedly take a chunk out of revenues, and the company's meager dividend is not filling enough to compel a hold rating should the worse that Washington has to offer come to pass in the short term.

As such the January put option expiring January 18th for a $24 strike price could be bought for just 10-cents a share in the 100-share contract as of December 21. The April put with the same $24 strike price was at 50-cents a share to buy, making it much more expensive and indicating that some sentiment exists that Kroger price will eventually level off its highs of late.

But will it fall below $24 fast enough and far enough to make the January option worthwhile?

Ultimately, that may depend upon whether or not there's a box of Twinkies or Ding Dongs on the other side of the fiscal cliff waiting for Kroger, who may prove to be a significant bidder for the liquidation of Hostess assets that is expected to start in earnest in February.

Depending on the prices, the Hostess and related brands could be viewed as a boon for Kroger that could produce a nice uptick in the stock price. Or it could cause a drag, depending on the market view of the costs incurred.

The $24 strike price for the Kroger January put option is tempting at $10, but I'd rather be a buyer and holder of the stock at $21, which is why I will continue to wait for Kroger, even if it means I miss out.


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