If you’re a believer in Warren Buffett’s oft-cited quote — essentially to be greedy when others are fearful — you may want to point your radar at food producer Tyson Foods (TSN). Although a fundamentally relevant enterprise (because we all have to eat), TSN stock has been volatile since the beginning of this month. Still, the fading red ink could signal an incoming rebound.
One useful tool to consider is Barchart’s Five Day Losers screener. As the name implies, the screener includes publicly traded securities that have suffered the most significant trailing five-day losses. The default option includes all U.S. exchanges, although the list can be broken down by individual exchange (including over-the-counter broker-dealer networks) and by market capitalization.
Primarily, the motivation to look at this dataset is exactly what Buffett mentioned: finding opportunities that other investors have given up on in the hopes of a rebound. Further, targeting significant five-day losses could be useful because the character of speculation could change depending on the current sentiment cycle.
For example, when a security trades within a defined channel along its established median trendline, it may be difficult to predict the next session’s trajectory; in most cases, it could be 50/50 or close to it. However, when a stock is following a big bout of volatility, contrarian investors may be incentivized to bid shares up as a value play.
Barchart’s Five Day Losers screener helps quickly identify these contrarian opportunities, making it a useful tool for further analysis.
TSN Stock Could Be in the Middle of a Sentiment Shift
Of course, the presence of red ink alone doesn’t guarantee upside. Otherwise, there would be no need for deep-seated research — investors would simply buy stocks that fell down in the prior session. Unfortunately, getting one over Wall Street isn’t that easy.
To further refine our analysis, we need to study the characteristics of our target security — in this case, TSN stock — comparing its everyday price behavior to behaviors under more extreme circumstances. To do that, we can download TSN’s historical data onto an Excel spreadsheet, a feature available for Barchart Premier members.
Next, we’ll apply two probability matrices on TSN’s weekly price action, a frequentist approach and a Bayesian inference. Regarding the former, we’re looking for what the chances are of a positive return on any given week. To calculate, we will divide the number of weeks with positive returns with the total number of weeks in the dataset (I prefer trailing five years).
For TSN stock, 49.8% of weeks in the past five years were positive, while 50.2% were negative. Practically speaking, TSN represents a 50/50 wager. However, the current week is special in that it follows a week where the food producer lost more than 4% of equity value. Therefore, we need to investigate the change in sentiment following a bout of volatility using Bayesian inference. The formula is below.
P(A∣B) = P(A∩B) ÷ P(B), where:
- P(A∣B) means the probability of A happening, given B has already occurred.
- P(A∩B) is the probability that both A and B happen at the same time.
- P(B) is the probability that event B happens.
By anchoring the target event as a weekly loss of 4% or worse, we discover that the probabilities shift. Out of 17 instances where this event occurred in the past five years (not including last week), 10 of the following weeks saw a positive return or a 58.8% success ratio. While this isn’t the greatest of odds, the bulls have more of an incentive to take a shot than the bears.
A Compelling Bull Call Spread to Consider
An additional aspect to consider regarding the conditional probabilities of TSN stock is the underlying average performance. During the positive rebound weeks, TSN managed to gain 1.66% over Monday’s opening price. Based on this past Monday’s opening price of $57.18, Tyson Foods stock could potentially hit $58.13 by this Friday.
In the past year, the average weekly performance has clocked in at 0.25% up. However, with the bulls likely to take advantage of TSN stock’s weakness based on prior historical trends, this average performance could tick higher. Therefore, by the next available options expiration date — Jan. 17, 2025 — it’s conceivable that shares could hit $60.
Therefore, I would look at the Jan. 17 55/60 bull call spread — that is, buy the $55 call and simultaneously sell the $60 call — as a speculative but balanced trade. This transaction would put $305 at risk for the chance to earn $195 by expiration or a payout of 63.93%.
While it’s true that the profit of probability is defined at 45.9%, that’s largely based on a frequentist approach. Using a Bayesian approach, the conditional probabilities suggest that the odds could be above 50/50. If you’re willing to take the risk, the 55/60 bull call spread seems intriguing.
