Part 5

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:

NextEra Energy (NEE)

Company Background

NextEra Energy Inc. is a public utility holding company based in Florida, USA which engages in the generation, transmission, distribution, and sale of electric energy. NextEra Energy was founded in 1925 and has established itself as one of the main players in the sector. The company currently represents 14.29% of the Utilities sector (XLU) and we believe that buying the stock in the 2nd part of the month, at a much more favorable level than where it is today, 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.

The company has both regulated and non-regulated energy-related products and services, with operations in 27 states in the U.S. and four provinces in Canada. NextEra Energy Inc. serves nearly 10 million people through approximately 5 million customer accounts. NextEra Energy produces a large volume of electricity from wind and solar energy. The company, through its subsidiaries, is advocating higher usage of clean fuel sources to generate electricity and aiming to reduce total carbon emissions by 67% within 2025 from 2005 base. The company aims to invest in the range of $50-$55 billion through 2022 to strengthen the existing operations. NextEra Energy Resources LLC (NEER) is the competitive energy business of NextEra and it plans to add 11,500-18,500 MW of clean power generation assets across the United States over the 2019-2022 time frame. Amid the challenges posed by outbreak of COVID-19, the company ensured that its major capital projects continue to proceed without any hindrances.

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

The stock is on our shopping list at the moment for many different reasons associated with the well-balanced capital investment plan, the new natural gas pipeline projects, the addition of renewable generation assets, acquisitions and adequate liquidity. We see this as a very strong overall positioning for the company to not only get through the current crisis, but to also emerge victorious once it is all said and done.

Shares of NextEra Energy have gained 23.1% in the past 12 months against the industry’s 2.4% decline. NextEra Energy is a premier U.S. utility service provider, offering efficient power and energy services across various states. Nearly 89% of its customers were residential and 11% were commercial. As we mentioned earlier, the more time people stay at home in the current environment, the higher the demand for NextEra Energy’s services will go, which will inevitably result in higher revenues and earnings moving forward.

Amid the unprecedented economic crisis due to the outbreak of novel coronavirus, the company still expects to achieve the targeted compound annual earnings growth rate of 6-8% through 2021 from an expected base of $7.70 per share in 2018, courtesy of strong asset base. For 2022, the company expects earnings to grow 6-8% year over year to the range of $10.00-$10.75 per share.

When times of broad-based economic slowdown are present, the companies that tend to survive these difficult times are usually the companies that have the liquidity and capital to get through the crisis. Thus, investors always look at the balance sheet of every company in order to determine its overall financial strength. Lower levels of debt and a strong cash position are some of the key things to look at when analyzing whether to buy a certain stock ahead of an upcoming economic recession.

NextEra Energy has been managing its debt quite effectively and has top-tier credit ratings from all major rating agencies ranging from A- to Baa1. The company had a long-term debt of $41,116 million as of Mar 31, 2020, higher than $37,543 million on Dec 31, 2019. As a consequence, its debt to capital at first quarter-end was 52.7%, marginally higher than the year-ago level of 50.7%.
The debt to capital of the company is also slightly higher than the industry’s 50.9%.

The increase in the debt level was primarily due to $4-billion long-term financings secured by the company to preserve liquidity amid the disruption caused by the COVID-19 pandemic. NextEra Energy issued $2.5 billion of equity units to further strengthen the liquidity position amid this liquidity crunch. The company’s times interest earned ratio at the end of the first quarter was 2.1, down from 2.7 at 2019-end. Although the ratio declined sequentially, the firm will be able to meet debt obligations in the near future without any difficulties. NextEra Energy had cash and cash equivalents of $3,335 million as of Mar 31, 2020 compared with $600 million on Dec 31, 2019.

Technical Analysis

We will be interested in buying the stock first at the $214 support level and then again around the major psychological support at $200, if the price gets there. We are long-term bulls on the stock and believe that the company has bright future in the coming years.

We will be looking to collect our initial profits at the $245 mark and will leave a portion of our long exposure for our secondary take profit level at $275.

From a technical standpoint the stock looks vulnerable at the moment as it has already appreciated substantially in the last 4 weeks moving from the $179 lows up to $247. This represented a 38% increase in less than a month for NextEra’s stock, which we now believe is due for a pullback. As you can see the chart for the stock is almost identical with the charts of XLU and XLP – a strong initial rebound, stopped by the 50-day and 200-day moving averages and around the 61.8% Fibonacci retracement level from the March 23rd lows. Additionally, the RSI is turning lower and moving within its downtrend which is again a confirmation for the expected decline in the stock.

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

Kimberly-Clark Corporation

Company Background

Kimberly-Clark Corporation was incorporated in Delaware in 1928 and in the last 92 years has established itself as one of the leaders in the manufacture and marketing of a wide range of consumer products around the world. The company conducts its operations in three business segments namely Personal Care, Consumer Tissue, and K-C Professional. Kimberly-Clark sells its products to supermarkets; mass merchandisers; drugstores; warehouse clubs; variety and department stores; retail outlets; manufacturing, lodging, office building, food service, and health care establishments; and high volume public facilities.

The Personal Care segment is the largest one in the company’s portfolio of products generating 49% of the top line (revenue) in full-year 2019. The segment includes products like disposable diapers, training and youth pants, swimpants, baby wipes, feminine and incontinence care products, and other related products. Products in this segment are sold under the Huggies, Pull-Ups, Little Swimmers, GoodNites, DryNites, Kotex, U by Kotex, Intimus, Depend, Plenitud, Poise and other brand names.

The 2nd largest business segment for Kimberly-Clark in 2019 was the Consumer Tissue segment as it generated about 33% of the top line in full-year 2019. The segment includes products like facial and bathroom tissue, paper towels, napkins and related products, which are sold under the Kleenex, Scott, Cottonelle, Viva, Andrex, Scottex, Neve and other brand names.

The K-C Professional was the smallest segment for the company in terms of revenue generated in 2019. However, it still play a key role in the overall success of the company with its almost 18% participation of the overall annual revenue for KMB. The segment segment consists of apparel, wipers, soaps, sanitizers, tissue and towels. Key brands in this segment include Kleenex, Scott, WypAll, Kimtech and Jackson Safety.

Current Position – COVID-19, Financial Performance & Favorable Business Trends

We believe that the company is uniquely positioned to capitalize on the significant increase in consumer spending for personal care products as a result of the global COVID-19 pandemic.

The rapidly-spreading novel coronavirus has rattled the global market and disrupted economic activities all around the globe. Governments around the world have implemented unprecedented measures (lockdowns, travel bans, curfews etc.) to encourage social distancing and complete physical isolation as this is considered to be the sole method for containing the spread of the pandemic. With community transmission being the main issue with spreading the virus, people have been rushing to the stores to stack up on essentials so that they do not have to venture out for daily supplies every day. Consequently, Kimberly-Clark is witnessing a spike in demand due to the panic-buying trends amid the coronavirus outbreak.

In this regard, the company is undertaking a number of measures to increase production of essential commodities. Also, Kimberly-Clark is reallocating inventory to provide consumers with greater access to its products amid the crisis. Notably, the company is assuring enhanced precautionary measures in its manufacturing units that continue to remain operational to support the production of essential commodities amid the coronavirus outbreak. It is important to note that shares of the company have gained 13.6% in the past year against the industry’s decline of 20%, which testifies for a great market positioning by KMB, high operating efficiency and substantial investors confidence in the senior management’s ability to continue growing the company.

Kimberly-Clark reported two stellar earnings reports for Q4 2019 and Q1 2020 wherein both top and bottom lines came ahead of the consensus estimates and the latter marked its fifth consecutive beat. The adjusted earnings of $2.13 per share for Q1 2020 surpassed the street’s estimates with the whooping 7.5% and increased 7% from the year-ago period. The quarterly performance reflected organic sales growth, savings from restructuring plans, increased brand investments and focus on innovation. Further, the K-C Strategy 2022 has been aiding the performance. The company ended 2019 with impressive margin growth, cost savings of $425 million and returns to shareholders of about $2.2 billion. All of these positives have been carried over in the Q1 2020 earnings report, showing that the management of the company knows what they are doing. Further, on the earnings call management re-affirmed their impressive outlook for 2020. The company forecasts 2020 net sales to grow 1% year over year. Further, Kimberly-Clark projects organic sales improvement of 2% on the back of higher net selling prices and volumes along with improved product mix. Additionally, management anticipates adjusted operating profit growth of 3-5% for the year. Considering all factors, management envisions 2020 adjusted earnings per share of $7.10-$7.35, up from $6.89 reported in 2019.

Despite being considered as a rather defensive stock pick, which usually means that investors should expect with lower growth projections, KMB has done a lot of work on building their own 3-stage growth plan focused on improving the intrinsic growth drivers for the company. Usually, when investing in the Consumer Staples sector investors are willing to sacrifice the higher growth of more exciting and dynamic stocks for a more stable and consistent performance of the likes of KMB, Procter and Gamble, Coca Cola etc. in order to protect their capital during times of economic uncertainty. However, Kimberly-Clark presents a very attractive combination of stability and a growth oriented leadership. The company remains committed toward its three key strategic growth pillars. These include focus on improving its core business in the developed markets; speed up growth of Personal Care segment in developing and emerging markets and enhance digital and e-commerce capacities. The company expects to meet these objectives through product development across different categories and leveraging capabilities in marketing and sales. The company has been progressing well with these objectives, which have been aiding portfolio and expanding global business.

Technical Analysis

The technical chart paints a rather impressive picture for the stock as KMB has managed to get back up all the way to its pre crisis levels, thus appreciating with 29.7% in the span of just 2 weeks back in April. 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 confirmed by 4 different charts (XLU, XLP, NEE, D), thus this will inevitably affect KMB’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 $143 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 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 $128 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 $118-120 mark. We will place our initial take profit level at $142, and our extended profit target at $150.

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Kind regards,

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