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Chart Of The Day: Has Pepsi Lost Its Fizz?

Published 07/11/2017, 10:00 AM
Updated 09/02/2020, 02:05 AM

By Pinchas Cohen

PepsiCo's (NYSE:PEP) stock has been good to its investors this year. As of its May-June $118 high, it has gained 13 percent this year, outperforming competitor Coca-Cola's (NYSE:KO) 11 percent and shaming the S&P 500’s paltry 9 percent. After an all-around correction, Pepsi closed up 9.2 percent on Monday, beating Coca Cola’s 7 percent, as well the S&P 500’s 8.4 percent. It even outperformed the Consumer Staples Select Sector SPDR ETF's (NYSE:XLP) 4.7 percent.

Analyst expectations for EPS have recently been bumped from $1.40 to $1.41 per share on revenues of $15.61 billion. The global food and beverage manufacturing giant is putting its hopes on a gain of 3 percent in organic revenue growth this year. The dollar is higher in a five-year view, making its products costlier for the 200-countries to which it exports, skewing long-term benchmarks against current profits. However, on a YoY comparison, the dollar is flat and therefore irrelevant.

The strategy of raising prices in order to offset FX losses failed with the Quaker Food business because of lower volume, or demand.. Revenue declined 3 percent, three times as much as the the 1 percent volume decline, precisely because of higher prices.

The market narrative has it as a foregone conclusion that Pepsi will beat profit expectations. After all, it has for at least the past 20 quarters, according to FactSet.

However, a deeper drill-down reveals that these profits are not due to higher sales but rather higher prices, designed to prop up profits by offsetting lower demand. That's not a solid business model.

In fact, at least part of the stock's rise is on anticipation of a possible merger. Barron’s reported on April 12 that Kraft Heinz Co (NASDAQ:KHC) may be planning a takeover, after Unilever (NYSE:UL) rejected its bid. The rumor has been spreading since March 2, while The Street reported on September 14, 2016 that the stock was rising as Susquehanna said that it could be Anheuser-Busch Inbev's (NYSE:BUD) next acquisition. But, how much of an anticipated buyout is already priced in may not be easy to discern.

How would the stock react if merger potential disappears? Remember Twitter (NYSE:TWTR)? Its stock fell 35 percent from $25 to $16 between October 5 and 14, when hopes of a buyout disintegrated. If we are to trust the supply-demand balance, investors shouldn't expect good results from today's earnings call.

Trend Reversal?

Pepsi Daily Chart

On June 27, Pepsi crossed below its uptrend line which it had held since January, and yesterday it completed a small double-top reversal pattern. Still, the trend has not truly reversed until it registers two consecutive lower peaks-and-troughs. So far, it has the two from June as well as yesterday’s troughs, but only upon a correction that would be capped below the $118 top will it also form two consecutive lower peaks.

While the very cautious investor would wait for the universe to fall into place, more risk averse traders will probably take advantage of this reversal-breakout, which was supported by the highest volume since the formation of the double-top.

Supporting evidence is found in the form of internal weakness. The trend-following momentum MACD indicator provided a sell signal upon completion of the first top, when the recent price average fell below the longer price average. It provided a second sell-signal upon the completion of the second top, when it attempted but failed to rebound and then extended its decline. The leading RSI momentum indicator beat the MACD when it provided a sell signal on June 5 with a divergent lower peak.

Pepsi Price Targets

Double-Top

The minimum object implied by the Double-Top is its height, 286 points, which brings it to $112.51. The 100 dma (orange) on $113.32 is the linebacker protecting the target.

Uptrend Correction

The rise of this uptrend line since January was 20 percent, or in dollars, $19.74. Since the minimum correction is expected to be a third of its advance, that would be $6.58, which would take the price from a high of $118.24 to a target of $11.66—at the very least. The previous December uptrend line is at those levels.

The prime question savvy investors would be asking: is this downside breakout led by “informed money,” who may have gotten a whiff that earnings will disappoint, or is it at least led by smart money, who are mostly right?

Trading Strategies

Conservative traders, or rather, investors, may wait for a trend reversal to be made official, when in addition to two lower troughs, the price action will post two lower peaks, as well. Should that happen, they would need to contend at that point with the lower December uptrend line, at the $112 price level, per the current angle. Another tactic is to wait for a return-move to retest the failed uptrend line, and that could take the stock back to its $118 high.

Moderate traders who want to trade this violated uptrend line and double-top reversal, would wait on a short for a return-move to the “reversaline” at $115.30, above which they would place their stop-loss.

Aggressive traders would risk a return-move to avoid missing the trade and enter a short ASAP, even upon an initial rise on earnings or otherwise.

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