"Don't catch a falling knife" is a well-known piece of market wisdom, and in my view, a fair one. Hormel Foods stock, after its latest earnings report, fits that description perfectly. I added to my position anyway.

Almost half a year ago, I wrote about this food producer here and opened a position. The stock traded at $22.65 at the time. My confidence rested on rock-solid financials, an unusually strong balance sheet for a food company, and the assumption that this dividend aristocrat would keep paying a generous dividend. On top of that came an attractive valuation. But as always in the market, my opinion alone doesn't matter, what matters is how the market as a whole reads the outlook, and that shows up in the price. Skepticism clearly persisted at first. The stock kept sliding, dropping to just under $20 by mid-May, before staging a nice recovery to above $26 by the end of June. Since that interim high, the stock has pulled back considerably, and this week's earnings report triggered a sharp drop on top of that.

Hormel Foods beat earnings-per-share expectations, but revenue growth fell short of estimates. Portfolio optimization efforts, lower input costs, and a strained consumer environment weighed on results. Even so, management raised guidance for adjusted earnings in the current fiscal year 2025/26 (ending late October). Specifically, the low end of the range moved up: the prior outlook of $1.43 to $1.51 per share is now at least $1.45, up from $1.37 last year. That implies growth of roughly 6% to 10%, which sounds good on its own. The real sticking point is revenue. It grew 2.3% last year, and the previous guidance for 2025/26 called for 1% to 4% growth. That target was now cut to just 1% to 2%. That likely weighed on the stock as much as management's cautious commentary looking beyond the current fiscal year. Management expects the difficult consumer environment to persist and doesn't foresee meaningful improvement in the coming quarters. That explains the negative price reaction as well.

My positive view on Hormel Foods's long-term prospects hasn't changed, though. I'm mainly betting on continued dividend payments. The current dividend yield of around 5.5% is notably high. I also see an attractive valuation. The stock trades at a P/CF ratio of 11, which translates into a cash flow yield above 11%, comfortably above the sweet spot for a long-term value investment. That gives me a solid margin of safety against the risks that undeniably remain, weak retail sales, pressure from private-label competition, and rising logistics costs among them. I'm well aware of all that, and the stock could stay under pressure for a while.

So I'm using the current weakness to catch that falling knife, against conventional wisdom. Is that crazy? Not if I'm wearing cut-resistant gloves. I'm doing it the same way I did with Verizon: structuring a dividend collar. I buy the HRL shares, buy a put option as downside insurance, and sell a call option whose premium covers most of the put's cost. The result: my maximum loss is capped the moment I open the position. The downside of this structure is that it also caps my upside. But as a long-term holding, the dividend is really what I'm after here.

Here's exactly what my current position looks like, per contract: I bought 100 shares at $21.37, bought a put with a $20 strike for $2.31, and sold a call with a $27 strike for $1.53. Duration: 511 days, expiring January 21, 2028. Over that time, I expect six dividend payments of at least $0.29 each, roughly $174 in total on 100 shares.

My capital at risk is $2,215. If the stock falls below $20, the put kicks in and I can sell the 100 shares for $2,000. Including the expected dividends, that leaves a loss of $41, about 1.9% of my capital. Without dividends, the loss would be $215. If the stock is above $27.00 at expiration, it gets called away at the $2,700 cap. My maximum gain including dividends is then around $660. That's nearly 30% on my capital, or roughly 21% annualized.

Is Hormel Foods a buy? At current prices, I consider Hormel Foods a buy for patient, income-focused investors, and I've added to my own position via a dividend collar after this week's earnings-driven sell-off. The stock trades at a price-to-cash-flow ratio of around 11, with a dividend yield near 5.5%. The main risk is a further slowdown in revenue growth if the weak consumer environment persists longer than management expects.

Disclaimer: This newsletter is for informational purposes only and does not constitute investment advice. I am not a financial advisor. Always do your own research before making any investment decision.

Disclosure: I may hold direct or indirect positions (including options) in any securities mentioned in this newsletter. My opinions are my own and always honest.