Part 6

Last month, we saw the strongest market rally since 1987, which is now giving investors a great opportunity to collect some profits and wait for better market prices in the coming weeks in order to re-open their long-term buying positions.

As usual, after we complete our ETF Correlation Analysis we pick the two best stocks in each ETF that have the highest probability of beating the market in the current environment.

One of our top stock picks from the Utilities Select Sector SPDR Fund (XLU) for the month of May is:

Dominion Energy (D)

Company Background

Dominion Energy Inc. was founded in 1909 in Richmond, VA. The company together with its subsidiaries produces and transports energy in the United States. It is a major energy company engaged in regulated and non-regulated electricity distribution, generation and transmission businesses. In addition, it sells electricity at wholesale prices to rural electric cooperatives, municipalities and through wholesale electricity markets. The company currently represents 8.03% of the Utilities Select Sector SPDR Fund (XLU) and we believe is well-positioned to benefit from the newly established lifestyle trends in the new stay-at-home economy. Our analysis shows that you will most likely get the chance to buy the stock in the 2nd part of the month, at a much more favorable level than where it is today, which in turn would be a great way to benefit from the expected short-term decline in the ETF and will allow you to position yourself in the right way as an investor for the long term.

Dominion has a portfolio of nearly 27,100 MW of generating capacity, 14,800 miles of natural gas transmission, gathering, storage and distribution pipeline, as well as 6,600 miles of electric transmission and distribution lines. The company operates the nation’s largest underground natural gas storage systems, with an approximate capacity of 1 trillion cubic feet (Tcf). It serves nearly 7.5 million electric or natural gas customers across 18 states.

Fundamental Position – COVID-19, Financial Performance, Favorable Business Trends

Dominion Energy as a company continues to benefit from strong contribution from its business units. The company plans to invest $26 billion in the 2019-2023 time period to strengthen its existing infrastructure. The company plans to invest $8 billion in 2020, out of which 70% will be invested in growth projects and rest for the maintenance of existing assets. In the past 12 months, shares of Dominion Energy have returned 10.9% compared with its industry’s 5.2% gain.

The novel coronavirus has taken a heavy toll on the economy, with millions of people being unemployed and in financial distress. Dominion Energy has shown its unquestionable support to its customers and the country in general with its commitment to assist customers who are in financial hardship and to continue providing services even in the event of non-payment of dues.

Secured earnings from more than 95% regulated assets will continue to drive Dominion’s bottom-line growth. Strong utility fundamentals in its service territories and increase in customer volumes are likely to drive demand and performance of the company. Planned investment in different segments and positive returns from the completed capital projects are expected to drive Dominion Energy’s earnings at a rate of 5% per year through 2020 and 5% plus thereafter.

The company has spent a lot of time and resources on working on grid transformation and has further planned to invest $500 million through 2021 for the completion of the grid transformation process. Dominion will install smart meters and smart grid devices, and provide customer information platform to enhance services to customers. Another innovative and socially friendly initiative that Dominion Energy has started is the deployment of electric school buses on the roads of Virginia. This initiative of Dominion is aimed at gradually replacing the fossil fuel-based school bus fleet with electric buses. Initially, 50 buses will be operational in 16 localities in 2020. Post successful implementation of this first phase, Dominion will place more electric buses in service with the state approval by 2025.

Dominion Energy, taking into consideration the expected rise in demand for natural gas, has started to build up natural gas distribution infrastructure. The company is working to replace the aging infrastructure and expand the capacity of its existing pipelines. As per the company’s most recent updates it expects natural gas usage to increase in the range of 18-40% by 2050 from 2015 levels. Thus, focusing on the expansion of natural gas infrastructure now will allow Dominion to reap the benefits of rising natural gas demand for the years to come. The company entered into a 50/50 partnership with Smithfield Foods to become a prominent renewable natural gas supplier of the United States.

Technical Analysis

The technical chart indicates that the stock is currently vulnerable at these levels and that a very likely decline is just around the corner in the coming days and weeks. This comes as no surprise to us here at DowExperts as we had already identified, cross-referenced and confirmed the weakness on three separate charts (XLU, XLP and NextEra) before we got to Dominion Energy. However, you can never get too many confirmations for a certain trade, as you always want to have the highest possible reassurance before committing your capital to the market. Similarly to our other stock-pick from this sector Dominion Energy had a remarkable 37% appreciation in April, as the stock moved from the $60 lows in March up to the $82 mark in just 2 weeks. Now, with a multitude of bearish signals on the chart (double-top reversal formation, fading RSI, bearish cross of the 50 and 200-day moving averages etc.) and a confirmed weakness across 4 different charts, our followers need to try to identify how low can the price go in the coming weeks for the stock and which levels should be treated as great long-term buying opportunities.

We are long-term buyers of the stock as we expect to see some of the newly established trends to affect the business positively in the months and years to come. However, we will first wait for the price to drop down to the $68-72 support area before we proceed with opening our long positions. In case the price breaks the above-mentioned support zone, we will be interested in adding more to our long exposure on the stock around the $62-64 mark. We will place our initial take profit level at $81.50, and our extended profit target at $90.

One of our top stock picks from the Consumer Staples Select Sector SPDR Fund (XLP) for the month of May is:

The Coca Cola Company (KO)

Company Background

The Coca Cola Company, based in Atlanta, GA is a global beverage giant with a portfolio including more than 4,700 beverage products (and more than 500 brands), spanning from sodas (or sparkling beverages) to energy drinks. In addition to its primary sparkling soft drinks (carbonated), the company sells a large range of still (non-carbonated) beverages including water, enhanced water, juices and juice drinks, sports drinks, ready-to-drink teas and coffees, and dairy and energy drinks.

The Coca-Cola Company’s strong brand equity, marketing, research and innovation help it to garner a market share of more than 40% in the non-alcoholic beverage industry. The company is putting its best foot forward to evolve its business model to become a total beverage company with something for everyone to drink.

The company has coped up with the industry-wide flattening of soda sales over the years by going on a buying spree and making investments in healthier alternatives like coffee, sparkling water and sports drinks. The roll out of Coca-Cola Energy, Coca-Cola Plus Coffee, Powerade Ultra and Powerade Power Water are some notable additions on these lines.

Popular sparkling beverage brands include Coke, Diet Coke, Fanta and Sprite while still beverage brands include Minute Maid and Powerade. Most of the company’s beverages are manufactured, sold and distributed by independent bottling partners. It sells products in more than 200 countries.

Fundamental Position – Financial Performance & Recession-proof business model

Coca-Cola’s shares have increased 4.2% in a year’s time, against the industry’s loss of 2.7%, owing to the effective execution of strategies by the company’s CEO James Quincey who has aimed at helping Coca-Cola to evolve and become a consumer-centric total beverage company. This has also aided Coca Cola’s recent quarterly performances as evident from its robust surprise trend. Notably, the company’s top and bottom line surpassed the consensus estimate again in the Q1 2020 report delivered on April 21st.. This marked the fifth straight top line beat, while earnings beat estimates in four of the last five quarters. Moreover, revenues and earnings improved year over year on robust volume and strong pricing. Organic revenues grew 7% attributed to higher concentrate sales and price/mix. Further, increase in global value share, particularly in total non-alcoholic ready-to-drink (NARTD) beverages, aided the top line.

The company has managed to recognize the need to stay on top of innovation and investment in core categories and brands as the global beverage industry continues to change and evolve constantly. Coca-Cola has not only talked the talk but has also committed to walking the walk as the company realizes that its the only way to ensure the future growth of the business. This mindset extends to all business aspects, ranging from massive categories like hot beverages to emerging ones like Kombucha. Constant innovation of brands is the key to the company’s sustained growth. In the sparkling portfolio, innovation at the Coke brand helped it accelerate global retail value by 6% in 2019. This was also driven by continued scaling of innovative offerings like Coca-Cola Plus Coffee, which is now available in more than 40 markets. Further, Coca-Cola Zero Sugar continued to expand its footprint, achieving another year of double-digit volume growth. In the non-sparkling portfolio, innovative products like innocent plus, a premium juice offering with added vitamins, continued to drive growth in the juice and smoothie category. In 2019, the company expanded beyond its flagship market of Europe for the innocent brand, with its launch in Japan. Further, the company expects to launch the innocent brand in more markets in 2020. Moreover, the recent introduction of two flavors to its Powerade sports drink brand, which is its first additions to the brand in more than a decade, is likely to re-ignite its competitive position in the market.

Technical Analysis

The technical chart clearly shows how the recent corrective up-move has been stopped in its tracks by the 50-day moving average, the strong horizontal and psychological resistance level at the $50 mark and by the key 50% Fibonacci retracement level from the March 23rd lows. With the RSI forming a lower high and turning lower within its downtrend the picture is quite similar to everything that we have discussed in one of our ETF correlation analyses this month. The market has gone up too much and too quick, and is now due for a more meaningful pullback. When looking at KO’s chart it is clear that the stock has made a phenomenal run to the upside after touching the $38 lows back in March. The stock reached the $50 resistance mark in less than 2 weeks, which represented a mind-blowing 31.5% gain for such a short period of time. A move like that is a remarkable accomplishment for a Consumer Staple stock, as we normally see these stocks moving in a rather slow, progressive and consistent manner.

However, despite the great Q1 Earnings report and the large number of positive intrinsic catalysts for the company’s core business operations, the stock is currently vulnerable and we expect to see a short-term decline towards some of the major support levels below. We should never forget that regardless how successful a company is it is still part of the broad market and when the market finds itself in a situation where it has already ran up too much and too quick, even the best stocks could be pulled down with the rest of the market. The current weakness that we have identified spreads across different sectors in the market and has been already confirmed by 5 different charts (XLU, XLP, NEE, D, KMB), thus this will inevitably affect KO’s stock price as well. However, this should be treated as a tremendous buying opportunity for all of our followers as we already discussed that the company’s business is strong and a potential decline in the stock price in the coming weeks will present you with an outstanding opportunity to buy into the stock at a great discount.

The stock was rejected from the $50 resistance zone and is now trending lower with an increased bearish sentiment. We are long-term buyers of the stock as we expect to see some of the new business initiatives and innovations that Coca Cola is focusing on to affect the business positively in the months and years to come.

However, we will first wait for the price to drop down to the $43 support level before we proceed with opening our long positions. In case the price breaks the above-mentioned support zone, we will be interested in adding more to our long exposure on the stock around the $40-41 mark. We will place our initial take profit level at $53, and our extended profit target at $60.

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Kind regards,

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