Part 2

The recent rally on the market has led to a short-term profit-taking correction that might be giving us great entry levels for our long positions.

After analyzing the performance of the ETF pair, we pick the two best stocks from each ETF that is believed to have the highest chance for beating the market in the current environment.

One of our top stock-picks from the XLP for the month of June is:

PepsiCo Inc. (PEP)

Company background

Our second stock-pick from the XLP would be PepsiCo, Inc. The company is the third biggest holding within the ETF with its 10% weight within the portfolio.

Founded back in 1898 in the United States, PepsiCo, Inc. is among the leaders in the multinational food and beverage sector all around the globe. Its complementary brands and businesses include Pepsi-Cola beverages, Frito-Lay snacks, Gatorade sports drinks, Quaker foods and Tropicana juices. As a global leader in the sector, PepsiCo servers customers in more than 200 countries around the world.

Current Position – Financial Performance & Technical Analysis

By looking at the financials of the company, we could see that PepsiCo has kept on growing its sales over the past 5 years. Moreover, the company has managed to keep its costs relatively low and has therefore been able to report solid net profit figures over the past 5 years as well.
Due to the COVID-19 pandemic and the negative impact on the economy, the company missed on the 1st quarter earnings report, delivering earnings of $0.96 per share, while the expectations among analysts covering the stock were for $1.03. Yet, taking into account the whole market negativity and the slowdown in the economy during the pandemic, we believe PepsiCo still managed to deliver a pretty solid earnings figure even such tough times on the market. In other words, it has shown investors that it can perform well even such economic slowdowns and make money for its shareholders.
Furthermore, the company paid a dividend of $1.02 to its shareholders in the first week of June, showing a strong financial positioning even during the current economic slowdown caused by the pandemic.

By looking at the chart, we could see the huge sell-off that occurred following the pandemic and the overall negative sentiment on the market that sent all stocks down significantly. In fact, PEP dropped from the $147 highs on the 20th of February towards the lows at $101 a month later. Yet, the whole market bottomed out back then and we have seen lots of buying interest towards the stock, which has brought it towards the $138 highs 3 weeks later in the middle of April. Since then, the stock has been consolidating between the $138 highs and the $129 lows. Overall, the stock has managed to recover a big portion of its losses in the past few months but it is still trading quite far from the highs at $147 formed before the virus came around. In other words, at the current levels around $129 the stock is still trading at a 12% discount from the highs.

Due to the correction in the past few months, the price is trading at 24x earnings, signaling for a further potential to the upside.

The daily chart clearly shows the strong diagonal and horizontal support levels standing at $124.50 where the price has found lots of buying pressure when was tested the last time in August 2019. In fact, the price failed to break that level to the downside back then and there was a strong appreciation towards the $137 highs 4 weeks later.

Therefore, we are expecting to see more buying interest among investors that would give them a chance to own one of the most well known brands in the world at a great discount. Thus, giving them a chance to maximize their investment returns to the upside.

The technical indicators have made a correction from the overbought territory and have already gone closer to the oversold area and would be crossing up soon, giving further bullish indications. Moreover, the key 38.20% Fibonacci retracement level matches perfectly with the strong support at $124.50, giving indications for a very likely upside reversal from that support.

Chart: PepsiCo, Inc. (PEP)

We will start buying PEP aggressively at the $125, just above the $124.50 support. Should the price break that first key support mark and drop further, we will be adding more to our buy positions at the next strong support at $120 where we will be able to improve our average cost basis. Our first take-profit target is at $133, followed by the longer-term target at $140 where we will fully cash in our profits and wait for another correction to the downside that would give us a chance to buy again and make more profits to the upside.

One of our top stock-picks from the XLV for the month of June is:

Pfizer Inc. (PFE)

Company background

The company is the 4th largest holding within the XLV with its 6% weight in the ETF’s portfolio.
Founded back in 1849 in New York City, Pfizer Inc. is one of the world’s leading pharmaceutical companies. The company has seen a huge success for many years, which was further supported by the joint merger of its consumer healthcare division with the UK pharmaceutical giant GlaxoSmithKline. The company develops and produces vaccines and medicines for a variety of medical disciplines, such as immunology, oncology, neurology, endocrinology, and cardiology.

Pfizer has got eight blockbuster products within its portfolio that are expected to boost its revenues and profits for many years to come.

Current Position – Financial Performance & Technical Analysis

In fact, the stable financial performance of the company could easily be seen by looking at its financial statements. It has managed to keep on delivering stable revenue and net profit figures in the past few years, while keeping its costs and borrowing (long-term debt) quite low. Its current debt-to-equity ratio is only 0.56, which also adds more value to the company’s overall financial stability.

The other ratios are quite impressive as well – the return on equity during the 1st quarter of 2020 was 26%, followed by the return on assets figure of 10% and the net profit margin of 31%. Moreover, it is important to say that the company has actually delivered better earnings during the Q1 2020 ($0.61) than the Q4 2019 (-$0.06). In other words, Pfizer has managed to decrease its costs and increase its profits during the pandemic of COVID-19 that led to a massive slowdown within the economy – a further indication for the company’s strong financial stability. Moreover, Pfizer paid a dividend of $0.38 again in the 2nd quarter of this year, showing investors that the management remains very positive for the company’s overall financial performance and expected growth in the future. That has also been seen very positive among investors that have been actively pushing the stock higher in the past few months after the massive sell-off that was caused all across the board when the virus started spreading all around the world.

By looking at the technical picture, we clearly see the strong bullish rally that took place between the 23rd of March and the end of April when the stock bounced from the $27 lows to reach the $39 highs (44%). Since then, due to the massive appreciation in a short period of time, investors have been motivated to cash in profits and have been selling at the resistance around $39 after the stock rally and that has led to a correction towards the current $33 lows. Yet, the daily chart clearly shows the strong support mark at $32.60-$33 where lots of buying pressure has taken place in the past. Therefore, the price failed to break that support on the 12th of May as some immediate bullish reaction took place once the price touched that level. In fact, the RSI indicator has already gone towards the oversold area, while the Stochastics is already crossing up in the oversold territory and giving bullish indications. Moreover, the lower Bollinger band is just above the support, while the 61.80% Fibonacci retracement matches perfectly with the support at $32-$32.60, giving further bullish indications. Therefore, we believe the recent correction from $39 towards the current $33 (15%) is giving us an amazing opportunity to buy the stock at a nice discount and make high profits to the upside.

Chart: Pfizer, Inc. (PFE)

We will start buying the stock aggressively at the $33, just above the strong support at $32.60-$32.70. In case of a further downside movement and a break down below the support at that point, we will be interested in adding more to our buy positions at the next key support mark at $30. Our first take-profit target is set at $36, followed by the next target at $39 where we will be collecting all our profits.

We at Dow Experts enjoy analyzing the market and helping our followers maximize their profitability by following our trading and investing ideas, which are always supported by our rational investment approach.

In order to further provide our followers with a strategy on how to fully capitalize on the above-described patterns and correlations, we analyzed the performance of some of the biggest companies within the SPY and XLY that have a big impact on the overall performance of the two ETFs.

You can subscribe to our Full Package in order to receive all of our top stock and ETF picks and analyses for the month plus new Bonus reports every month!


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