Hot Potato: Lamb Weston Stock Confirms a Top

Key Points

• Shares of Lamb Weston popped in the wake of the FQ1 report but the top may already be in. 
• Lamb Weston is highly valued and pays a low dividend compared to peers. 
• General Mills and Kraft Heinz both offer better value and higher yields. 

Shares of Lamb Weston (NYSE: LW) have been a hot potato since hitting bottom earlier this year but the meteoric rebound may be over. The FQ1 results are strong and point to solid results in the future, plus a strong dividend payment. However, other factors hang over Lamb Weston stock that may cap gains or even spark another correction in the price action. Among them are valuation and dividends, two qualities that can be found in other fundamentally strong consumer staples stocks like General Mills (NYSE: GIS) and Kraft Heinz (NASDAQ: KHC). Both of these stocks trade at multiples near or less than half of the 28x earnings you will pay for Lamb Weston and both pay more than double the yield.

Lamb Weston Pops on Mixed Results

Lamb Weston shares popped in the wake of the FQ1 earnings report in what can only be described as a knee-jerk reaction to some lukewarm news. The company reported mixed results that included a better than expected margin but only reaffirmed the guidance. This means that not only has the company’s earnings power peaked for the year, the following quarters may be weaker than previously expected as well. 

In that light, it makes sense that while shares are up strongly following the report, they also show strong resistance at these lofty levels and what could turn into a very nasty bearish candle pattern (assuming this is how the market closes at the end of the session). The candle pattern is a shooting star whose shadow makes it one of the largest candles in a year, and a doji formation confirms resistance at a previously confirmed level. 

There are only three analysts with current coverage which speaks volumes. The stock isn’t attractive enough for the big money, so why is it attractive for retail investors? That aside, the consensus rating is a "moderate buy" with a price target well below the current price action. The high price target is even lower than the current price action, which suggests a pause is in order for this market if not a stop or reversal. Lamb Weston is not a bad company, but it may not scream "buy me!" at this time. 

General Mills Beat and Raised Guidance 

General Mills beat on the top and bottom lines and raised its guidance because of strong demand for packaged foods. That news equated to a new all-time high for the stock, which has pulled back to support at the 30-day EMA which could be viewed as an attractive entry point. Seven of the eleven analysts covering this stock upped their price targets in the wake of the report. The consensus target for General Mills still hovers in line with the price action but it is trending higher in the one, three and 12-month comparisons, while the Lamb Weston target is down in all three. As for value and yield, General Mills trades at 19 times earnings and pays 2.75% in yield while Kraft Heinz, which is slated to report at the end of October, trades closer to 14 times its earnings and pays more than 4.5% in yield.