Analysis: PEP AWK KO

After you receive this alert, we will make the following trades:

  • Buy 315 shares of PepsiCo (PEP) at or near $161. Following the trade, this is a new position in the portfolio and following the trade PEP shares will account for 1.5% of the portfolio.
  • Buy 120 shares of American Water Works (AWK) at or near $145.50. Following the trade, the portfolio will own 450 AWK shares, roughly 1.95% of the portfolio.


We are using the combined move lower from last week and this morning to start a fresh position in PepsiCo shares, which have pulled back to levels we shared recently that offer a more than favorable risk to reward profile in the shares. We also like the company's extremely long track record of increasing its dividend, which speaks to its ability to recognize pricing across its ever-evolving portfolio of snacks and beverages.

The consumable nature of the company's products tied with our need to eat and the prospects that inflationary pressures and concerns will lead consumers back to the grocery store are also bullish factors as is the "buy the bullets not the guns" nature of its business. By that we mean the company's products are widely available across a variety of grocery and convenience stores, not just one retailer.

Some may ask why PepsiCo over Coca-Cola (KO) shares, and the answer to that is found in PepsiCo's snacking business which in our view more than compensates for any pressures to be had on sugar and sugar alternative case volumes.

With an upside of roughly 10% to our $177 price target plus the current dividend yield of 2.7% on the company's new annualized dividend of $4.30 per share, we are starting PEP shares off with a Two rating. If market pressures weigh on them further in the near-term, pulling them closer to $155, we would not only look at build out the position size but also upgrade the shares to a One rating. As we see below, PEP shares have strong technical support as evidenced by the weekly chart.

American Water Works

As we make this move, we will also use the weakness in American Water Works to build out that position size as well and at levels that should reduce our average cost basis.

Even after these trades, the portfolio's protective position as measured by our remaining cash levels and the market hedging inverse ETFs at our disposable will continue to offer ample cushion as we begin what could be a challenging week for the market.

PEP's Charts Have Some Flexibility

We might consider Pepsi a more 'defensive' type name, though for the past few years they have shown some nice growth in their brands. Still, the price of 'things' remains heated around the globe and that means price hikes all around. Pepsi is the sort of brand that raise prices and has them stick and not lose much market share (that has happened in past downturns).

The chart is showing a mixed picture between the daily and the weekly. Notice the downtrend channel is well-defined on the daily chart, with lower highs and lower lows. This is typically the sort of chart we would find that mimics the market indexes, and that appears to be the case.

This move down to 160 or so was something we had our eye on, and there is good support on the weekly chart while volume trends have slowed down lately on the recent selling.

Indicators across both timeframes are bearish but this stock certainly merits consideration here for its long-term bullish prospects. The stock is about 10% off recent highs and presents an excellent spot to start adding to this name. 

(Please note that we are looking to execute these trades at or near the share price mentioned above. Once the trade is completed, subscribers can see the trade's executed price here. Be sure to toggle the chart to sort by Purchase Date.)