Is Procter a Gamble?

07/26/2010 12:30 pm EST


Joseph Hargett

Financial Analyst, Schaeffer's Investment Research, Inc.

Joseph Hargett of Schaeffer’s Investment Research says the consumer goods giant’s stock is stuck in a trading range, and sentiment is bullish, so investors need to wait for a breakout.

According to [a recent article in Bloomberg] BusinessWeek, the recent reports of slower US economic growth could be a boon for those stocks known to hold their resilience during rough patches. Among those groups that investors should key upon, according to the author, are those in the health care and consumer goods sectors. "Maybe we'll have our moment in the sun," says Scott Armiger, portfolio manager at Christiana Bank & Trust Co., who has a high concentration in consumer staples stocks.

Within those groups, Johnson & Johnson (NYSE: JNJ) and Procter & Gamble (NYSE: PG) are highlighted as the largest among their peers. While both are down since April 23rd, the article notes, they are still outperforming their peers in the Morgan Stanley Cyclical Index. "Consumer staples and health care stocks typically have more predictable, less volatile earnings streams," says Michael Sheldon, chief market strategist at RDM Financial Group.

Following this line of thinking, the problem becomes which stocks to focus on. According to Wayne Titche, chief investment officer at AMBS Investments, "the key is finding companies with strong balance sheets and cash flow, good management, and the ability to develop new products and gain market share."

While [it] isn't the focus of this BusinessWeek piece, the author mentions PG in the context of being a "high-quality stock" that could be a market leader. Like the rest of the market, the stock has had a rough year, gaining only about 2% since the start of 2010. However, compared to the Standard & Poor’s 500 Index's loss of 4.5% for the same time frame, PG's minor gain looks quite solid.

The problem for most short-term investors, however, is that the stock has largely been range-bound between $59 and $64 since November 2009. What's more, PG has suffered through this trading range despite rising volatility in the broader market.

On the sentiment front, optimism is running high on PG, despite the equity's lack of direction. For instance, options traders have bought to open 2.7 calls for every one put purchased on the International Securities Exchange (ISE) and Chicago Board Options Exchange (CBOE) during [a recent two-week period]. The resulting ten-day ISE/CBOE call/put volume ratio of 2.69 ranks above 77% of all those taken during the past year.

Elsewhere, analysts are quite bullish toward PG. According to Zacks [Investment Research], 16 of the 23 analysts following the shares rate them a Buy or better, with nary a Sell rating to be found. While the consumer goods giant's shares may be an excellent investment from a long-term perspective, the equity's current trading range and bullish sentiment present a problem for PG traders. Should the current batch of optimists grow tired of waiting on a PG breakout, an unwinding of these bullish bets could mean that better entry points for buy-and-hold [investors] will emerge further down the road.

(The stock closed below $62 Friday, just 4% below its 52-week high—Editor.)

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