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Campbell Soup could go from value play to 'value trap,' investor warns

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This is what could topple Campbell's rally

Campbell Soup is piping hot.

Its shares ended Friday with their best weekly performance in 30 years as investors cheered a positive earnings report days earlier.

Quint Tatro, founder and president at Joule Financial, says the stock could start to cool off.

"We've been buyers lower than here, but they really face some headwinds," Tatro said Friday on CNBC's "Trading Nation."

The biggest, he says, is its balance sheet overladen with debt, a problem it has been looking to fix by selling off certain units. Mondelez reportedly ended its pursuit of Campbell's Australian Arnott's brand last week, a deal with a potential $3 billion price tag.

Selling off units is a double-edged sword, though, as it also hits its bottom line, warns Tatro.

"Even if they manage to sell off their international unit, that brings in 19% of their revenue, it's going to help to shore up their balance sheet which is in desperate need of that — they have too much debt. But it will ultimately be dilutive for earnings," said Tatro. "Look at it on pullbacks and you watch it closely because if they are not able to shore up that balance sheet, it's not a value play, it's a value trap so be careful."

The technical setup also suggests Campbell Soup could be in for a rough patch after its steep run-up this year, according to Craig Johnson, chief market technician at Piper Jaffray.

"If you look at this chart, yes it is constructive that we did reverse a downtrend off of the 2016 highs, but from our perspective the stock is starting to get short-term overbought," Johnson said during the same segment.

Campbell Soup's relative strength index has spiked to 75, a level that typically signals overbought conditions. The last time it was this overbought was a year ago, and its share price tumbled 25% through to the year's end.

"We'd wait for a pullback to $40 before we step up and try to buy this stock," Johnson said.

Campbell's would need to fall 7% to get to Johnson's $40 target. It spiked above that level last week.

Disclosure: Joule Financial is long Campbell Soup.