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Safe Bets In The Face Of Uncertainty

01/11/08 10:05:16 AM
by Mike Carr, CMT

Economists at leading brokers are forecasting a recession, while a poll of economists by Bloomberg forecasts a slowdown. Either way, consumer staples offer potentially rewarding investment opportunities.

Security:   PEP
Position:   Buy

As the economy weakens, consumer spending is likely to decline as households increasingly focus on necessities. Necessities are usually considered to be products we use everyday and will continue to use without thinking about their cost. Demand for these products, things like food, drugs, beverages, and cleaning products, tends to be stable. Because of this stability, sales and earnings growth in this sector tends to remain constant in good times and bad, and these stocks are often thought of as a great way to reduce risk in declining markets.

The long economic expansion we have enjoyed may have changed the way consumers think of everyday products. As the market declined over the past few weeks, the food and beverage group has held up very well. That latte and muffin at Starbucks is an important part of the day for many people, and this might be one area that creates investment opportunities. The American consumer has fallen into a new habit and a slowing economy may not eliminate the drink and the snack from their day, but it may shift their buying patterns.

FIGURE 1: KO. Coca Cola is bullish, with a successful test of the trendline being followed by a MACD buy signal.
Graphic provided by: OmniTrader 2008.
Coke (Figure 1) and Pepsi (Figure 2) have been very strong performers in this market. Both are at multiyear highs, and both successfully tested trendline support in recent weeks. The MACD is bullish for both stocks. Technically, both issues represent strong buy candidates, and stop-loss points can readily be identified near the recent lows, offering a low-risk profit opportunity.

FIGURE 2: PEP. Pepsi shows the exact same chart pattern as KO. When stocks within a group are behaving the same way, the technician can have added confidence in their stock selection.
Graphic provided by: OmniTrader 2008.
Fundamentally, KO has a higher dividend yield of 2.1% along with a higher P/E ratio of 28 and higher forecasted earnings growth of 12.4%. PEP may be the better fundamental choice since it offers a lower PEG ratio. This fundamental measure compares the P/E ratio to the expected growth rate of earnings. At 1.96, PEP is considerably lower than KO's 2.25. While both stocks are technically strong, combining fundamental strength with strong technicals is a great risk reduction strategy for an uncertain market environment.

Mike Carr, CMT

Mike Carr, CMT, is a member of the Market Technicians Association, and editor of the MTA's newsletter, Technically Speaking. He is also the author of "Smarter Investing in Any Economy: The Definitive Guide to Relative Strength Investing," and "Conquering the Divide: How to Use Economic Indicators to Catch Stock Market Trends."

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Date: 01/12/08Rank: 4Comment: 

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