Buying the Dip in This Spice Maker Should Offer Big Rewards

StreetAuthority Network

Spice and seasoning maker McCormick & Company (MKC) left a bad taste in shareholders' mouths in late January when it missed revenue estimates.

Shares of the processed and packaged food goods company, whose brands include Lawry's, Old Bay and Zatarain's, dropped more than 6% the day of the Q4 earnings release.

MKC reported adjusted earnings per share (EPS) of $1.20, which beat estimates by a penny a share. However, the company failed to impress on the top line, with revenue coming in at just $1.17 billion, where Wall Street was hoping to see $1.22 billion.

Following the miss, Deutsche Bank (DB) downgraded MKC to "hold" from "buy" with a one-year price target at $66, which is only slightly higher than current levels. The stock just made a 52-week low of $62.75 on Friday.

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MKC Stock Chart

Despite the revenue miss and drop in share price, I believe MKC is a buy at current levels.

First, I think MKC was unfairly abused after what can be described as a solid earnings report. Sure, the company didn't meet estimates on the top line, but its Q4 revenue did increase 2% year over year. Earnings increased 8% from the year-ago period, and adjusted operating income improved 7%.

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Second, we all know that it's tough to "fight the tape." The selling in MKC took place during the biggest sell-off days of the year so far. That means the stock got caught up in the wave of emotional selling that sent longs running for cover to avoid what could have been a nasty market storm.

Trading over the past couple of days in the broad market suggests that the recent pullback has run out of steam, at least for now. So this could be the perfect time to buy stocks that came under undue pressure to ride the rebound. From a pure "buy the dip" standpoint, MKC looks good to me at current levels.

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Recommended Trade Setup:

-- Buy MKC at the market price
-- Set stop-loss at $59.98, approximately 7% below recent prices
-- Set initial price target at $70.93 for a potential 10% gain in three months

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