Many investors have been looking for value recently. Is the stock attractive to buy?


Company background

Procter & Gamble Company is a branded consumer products organization that markets its products in more than 180 countries around the world through mass merchandisers, membership club stores, grocery stores, drug stores, department stores, distributors, baby stores, e-commerce, pharmacies and others. The company offers basic necessity products needed for people’s day-to-day life, such as hair care products, conditioners, shampoos, styling aids treatments, deodorants, antiperspirants and others.


Financial performance

P&G has managed to perform quite well even during the economic slowdown caused by the COVID-19 pandemic. The reason for that is the essence of the products it provides – non-discretionary. In other words, those products that customers buy for their basic needs. Such companies tend to do well even during tough times on the market and provide investors with more security on their investment.

Thanks to the company’s strong brand awareness and variety of basic necessity products it offers to clients around the globe, Procter & Gamble has managed to perform quite well during the COVID-19 pandemic and hasn’t really felt the negativity and the economic slowdown that followed caused by the virus as much as many other companies out there from different sectors.

In other words, the company reported better than expected results in the past 4 quarters since Q2 of 2020. We had actually seen an increase in profitability in each quarter between Q2 and Q4 last year. The Q1 earnings came out a bit worse than the Q4 result but still better than analysts had expected. In other words, P&G reported $1.26 per share, while the expectations were for $1.18 per share. In fact, the earnings were aided by robust top-line growth and improved margins. Higher pricing and boosted sales have been driving the company’s profitability. Moreover, the company has raised its free cash flow productivity target to more than 100% for the fiscal 2021.
The company’s return on equity is 32%, while its return on assets figure is 12%, and it has got a debt to equity of 0.46 which is quite reasonable and conservative, meaning it isn’t depending too much on debt to finance its operations. In fact, especially during such economic turmoil, investors look for quality and value stocks mostly. Thus, those stocks that haven’t overleveraged themselves are quite preferred as opposed to others that depend too much on debt financing.

Procter and Gamble’s revenues have been growing steadily over the past 5 years. As a matter of fact, the company reported a net profit of $9.75 billion for 2018, followed by a decrease to $3.9 billion for $2019 and a huge increase of $13 billion for the fiscal 2020. In other words, during the pandemic times the net profit of the company has increased 4 times, which is quite impressive and shows the great financial positioning of the company.


Technical analysis

The daily chart of PG shows the strong uptrend on the stock since the 23rd of March last year. In fact, PG went up from $91 back then to reach the $139 highs in November 2020. Since then, the stock has been trading in a range between $120 and $140. The most recent uptrend has been going since the first week of March 2021 when the price bounced from the lows at $120 to reach the $140 mark in the middle of May, followed by a bit of a profit-taking correction towards the first key support at $133 and a bounce towards the current levels at $135. Well, there has been lots of buying pressure at that key support level at $133 and the price bounced from that level on a few occasions, as well as in the first week of June. The Stochastics and the RSI went close to the oversold territory and started pointing back up, giving further bullish indications. Moreover, the lower Bollinger band matches with the diagonal and the horizontal support mark at that point, which also stands right at the 38.2% Fibonacci retracement level, giving lots of bullish indications at that point. The Stochastics has already crossed up, giving strong buying indications and the RSI is pointing higher, signaling for a very likely upside rally from that point.

Based on the strong financial performance and market positioning of PG, we would like to add it to our portfolio.

Chart: PG

Dow Theory 2.0 – Correlation Confirmation

As you know, we at Dow Experts enjoy analyzing different trading and investment opportunities. In fact, we always include the importance of both fundamental and technical factors that have an impact on the different price movements on a daily basis. Moreover, before we decide to take an action and buy a particular stock we are analyzing, we evaluate the performance of the biggest ETFs out there that invest in the stock and it plays an important role in their portfolios. In other words, we use our cross- sector correlation analysis in order to find out whether there is a similarity between the price-action of the current stock we are analyzing and the certain ETFs that own the stock. Only in case the recent performance of the ETFs confirms our bullish stance on PG we would then be interested in adding the stock to our portfolio.

The Consumer Staples Select Sector SPDR Fund (XLP) tracks a market-cap-weighted index of consumer non-discretionary (staples) stocks drawn from the S&P 500. The XLP represents the performance of the biggest players within the sector, such as Procter & Gamble, Coca-Cola, PepsiCo, Walmart and others. Moreover, the leading ETF has got $11 billion in assets under management and an average daily trading volume of $856 million, making it a very attractive investment opportunity that gives an exposure to one of the biggest sectors within the US economy that has actually been very attractive for investors and traders over the years. In fact, the reason for the sector being so attractive is because of the essence of the products the companies within that sector offer – non-discretionary. In other words, the sector is concentrated on selling products of utmost necessity and needed for a customer’s daily life. Therefore, those stocks tend to perform well even during bad times on the market, giving investors more security and bringing lower risk on their investments.

Procter and Gamble plays an important role within the XLP with its 16% weight within the portfolio.

Technical analysis

The daily chart of the XLP shows the massive uptrend that has been taking place over the past 15 months since March last year. During that period of time, the XLP has gone up from $48 lows to reach the current highs at $71.50. After such a massive rally to the upside, we wouldn’t be surprised if traders and investors decide to cash in some profits in the near future that could lead to a bit of a profit taking correction. Yet, the price is likely to find lots of buying pressure at the strong support level at $70, followed by the next one at $68, which is expected to push the price higher afterwards and investors would be able to take advantage of a short-term pullback in order to maximize their profitability to the upside. Even if the price manages to break those two key support marks, it would be expected to bounce from the 3rd major support at $64-$65 where it would be trading at a $8 correction from the highs, which would be giving a great buying opportunity at just more than 10% from the top, expected to motivate lots of market participants to enter their buy positions at that level.

Overall, the recent price action of the XLP looks very similar to the PG stock and further confirms that it would be reasonable to wait for a small correction before buying the stock at a strong support level.


Chart: XLP


In order to further confirm our bullish expectations for PG, we have decided to analyze the recent performance of the other leading ETF that owns the stock – the SPY.

The SPDR S&P 500 ETF (SPY) tracks a market-cap-weighted index of US large and mid-cap stocks and is the best recognized and oldest ETF, typically topping rankings for largest assets under management (AUM). Actually, the SPY has got $350 billion in assets under management. The SPY is also the ETF with the greatest average daily trading volume with its $30 billion. Moreover, the SPY is very well diversified thanks to its investments in different sectors on the market. Its current biggest holdings are Microsoft Corp., Apple Inc., Amazon.com, Facebook Inc., Alphabet (Google), Berkshire Hathaway Inc., JPMorgan Chase Inc., & Visa Inc. Procter and Gamble accounts for 1% of SPY’s total portfolio.


Technical analysis

The daily chart of the SPY looks similar to the PG stock and the XLP that we have looked at above. In fact, after a massive uptrend the price is currently testing a key resistance at $423 where some profit-taking interest took place in the first week of May, leading to a correction to the $405 mark. Yet, the price faced lots of buying pressure at that level where investors were buying at a correction and pushing the price back up towards the resistance mark. Thus, the price is currently quite overbought and that could also be seen by looking at the RSI and Stochastics, as well as by the Bollinger band, which are giving some short-term indications for a potential correction from that level. Yet, once the price makes a correction to the downside it would be expected to find lots of buying pressure at the first key support at $400-$405. Should it manage to break that level to the downside, we believe more buying pressure would take place at the next key support at $375-$380 and the price is likely to bounce from one of those key support marks and reverse back to the upside.

Chart: SPY


Overall, we remain positive for the SPY for the near future and that further confirms our bullish stance on PG stock. Thus, we would like to add it to our portfolio.


Conclusion

After analyzing the financial performance of Procter & Gamble, we have been quite impressed by the company’s great market positioning and brand awareness, which have been helping it perform quite well even during the COVID-19 pandemic and the economic slowdown that followed. Yet, we shall say again that one of the main reasons the company did such a good job during the pandemic times was the essence of the products it offers –non-discretionary or in other words basic necessity products that are needed for a customer’s daily life.

In fact, there is hardly any crisis for such products and customers tend to buy them no matter what the economic situation is at the moment.

The company has been reporting strong results in the past few quarters, further confirming their strong financial and market performance.

In order to decide whether we should add the PG stock to our portfolio we have also looked at the two leading ETFs (XLP & SPY) that own the stock for a further clarification. Well, both of the ETFs we analyzed have confirmed our bullish stance on PG stock and therefore we would be looking to add it to our portfolio.

We would start buying PG at around the first key support at $133. Should the price drop further in the short-term we would be looking to add more to our long positions right above the next strong support at $127 where more buying pressure is expected. Our initial profit-taking target is set at $140-$145, followed by the next target at $154-$158 where we would be fully cashing in our profits and waiting for another correction that would give us a chance to own that great stock at a discount again in the future.

Sincerely,

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