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Why Sanderson Farms Stock Rocketed 12% at the Open Today

By Reuben Gregg Brewer - Jun 22, 2021 at 10:06AM

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The poultry giant is "in play," as Wall Street likes to say...or at least that's the hope, according to people in the know.

What happened

Shares of chicken giant Sanderson Farms (SAFM) rallied out of the gate on June 22, jumping as much as 12% in the first 90 minutes of trading. That said, by 10:30 a.m. EDT the stock had cooled a touch, sitting with a gain of around 10%. The reason for the dramatic price advance was a Wall Street Journal article.

So what

According to The Wall Street Journal, Sanderson Farms has hired Centerview Partners for advice on a potential sale of the company. Moreover, "people familiar with the matter" explain that there's already interest in such a transaction, with Continental Grain specifically being highlighted as a potential suitor. Obviously, investors would expect a premium to the price of the stock prior to this information coming public.

The letters M & A with three pairs of hands working.

Image source: Getty Images.

There is no guarantee that this rumor turns into a sale. Only time will tell. However, it is an opportune time to look at such a transaction, given that demand for chicken is high and prices are elevated. To put a number on that, in late May Sanderson Farms reported fiscal second-quarter 2021 sales that were 34% higher year over year, with earnings having increased from $0.28 per share to $4.34. Sanderson Farms appears to be striking while the iron is hot. Investors, expecting a premium, likely bid the stock up on the news.

Now what

Rumors are just rumors until something actually happens, but Wall Street has an old adage: Buy on the rumor, sell on the news. So it's not surprising that a news story from a reputable source like The Wall Street Journal would result in investors bidding Sanderson Farms' stock higher. That said, Wall Street has already priced in some of the potential upside here, so at this point long-term investors should probably just watch from the sidelines. That's not to suggest that a deal won't take place, just that the gains from this point may not be worth the risk that a deal doesn't pan out.

Reuben Gregg Brewer has no position in any of the stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy.

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