2 Consumer Defensive Stocks Facing Potential Short Squeeze

Reddit chat room known as 'Wallstreetbets' behind trading frenzy

Despite the stock market suffering its steepest loss since October, several leading consumer defensive names moved higher Wednesday as traders took bets over what stocks may be next to join a speculative trading bubble sweeping across Wall Street, and indeed, Main Street.

Key Takeaways

  • Several leading consumer defensive stocks saw unusual buying activity in a down market during Wednesday's trading session.
  • Campbell Soup Company (CPB) shares broke out from a five-month descending triangle on above-average volume Tuesday, with gains accelerating in yesterday.
  • The J. M. Smucker Company (SJM) shares staged an impressive breakout above a symmetrical triangle earlier this week, hitting a 34-month high Wednesday.

Over the past week, an eyepopping 1,500% gain in strip mall video game seller GameStop Corp. (GME) and a fivefold increase in movie theatre operator AMC Entertainment Holdings, Inc. (AMC) has taken many players by surprise.

Market commentators attribute the buying frenzy to a three-million-member Reddit chat room known as "Wallstreetbets"—a group of retail traders who allegedly have the intention of driving up share prices to create a squeeze in stocks frequently shorted by institutional investors and hedge funds. "This is gaining cult-like status," Quincy Krosby, a chief investment strategist at Prudential Financial, told CNBC. "It is a pack of traders, and the pack is gaining momentum. The retail crowd is not just taking over the shorts, and it's taking over the headlines," he added.

Below, we take a closer look at two consumer defensive stocks that saw a wave of buying in yesterday's trading session. We'll also analyze the charts to discuss possible momentum trading plays.

Campbell Soup Company (CPB)

Campbell Soup manufactures and markets food and beverage products, most notably soup. The 152-year-old company behind brands such as Campbell's, Pace, Prego, Swanson, and V8 posted fiscal first quarter (Q1) bottom-line growth of 31% and smashed analysts' earnings per share (EPS) expectations by 11 cents per share. The soup maker continues to benefit from more consumers cooking and dining at home, with many industry experts believing that the trend will remain after the pandemic.

As of Jan. 28, 2021, Campbell Soup stock has a market capitalization of nearly $16 billion, offers a 2.96% dividend yield, and is trading 9% higher this month. Over the past year, the shares have added 8%.

The share price broke out from a five-month descending triangle on above-average volume Tuesday, with gains accelerating in yesterday's session. Look for short sellers to continue covering their positions in the coming days, given the stock has nearly 11% of its float held short. Those who buy here should consider using a trailing bar stop to book profits. To do this, place an initial stop loss under the current day's low or previous day's low, raising the order as the stock rises until stopped out.

Chart depicting the share price of Campbell Soup Company (CPB)


The float refers to the regular shares a company has issued to the public that are available for investors to trade.

The J. M. Smucker Company (SJM)

With a market value of $16 billion, J. M. Smucker manufactures and sells packaged foods through four business segments: U.S. Retail Pet Foods, U.S. Retail Coffee, U.S. Retail Consumer Foods, and International and Away From Home. The maker of Kibbles 'n Bits saw fiscal Q2 profit jump 6% and raised its guidance for the upcoming year while reaffirming a commitment to brand investments. Management now expects 2021 EPS to fall in a range between $8.55 and $8.85, up from its previous forecast of $8.20 to $8.60. Smucker shares issue a 2.9% dividend yield and have jumped nearly 11% year to date as of Jan. 28, 2021. Over the past 12 months, the stock is trading up 19.58%.

Smucker shares, which have a short interest ratio of 8.69%, staged an impressive breakout above a symmetrical triangle earlier this week, hitting a 34-month high Wednesday before easing in late trade. Traders who want to position for follow-through buying should think about using a fast-period moving average, such as the eight-day simple moving average (SMA), to bank profits. To use this exit strategy, simply remain in the trade until the price closes below the indicator.

Chart depicting the share price of SJM.

The short Interest ratio is a simple formula that divides the number of shares short in a stock by the stock's average daily trading volume. Simply put, the ratio can help an investor find out very quickly if a stock is heavily shorted or not shorted versus its average daily trading volume.

Disclosure: The author held no positions in the aforementioned securities at the time of publication.

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