Big tech may attract the majority of headlines, but a small group of high-yielding but slow-moving equities have generated equally impressive gains in recent years. PepsiCo, Inc. (PEP) sits at the top of this winner's list, posting a long series of new highs while paying annual dividends that now average around 2.75%. However, given months of outstanding performance, the July 11 earnings report should be watched closely for signs of weakness that undermine the bullish narrative.
It may be useful to compare PepsiCo's long-term price action with that of arch rival and Dow component The Coca-Cola Company (KO), which remains stuck below the historic high posted nearly 20 years ago. Coca-Cola pays a slightly higher 2.90% dividend while trading similar total share volume after adjustment for PepsiCo's higher stock price, telling informed market players that the best strategy is to stick with the obvious winner. (See also: The Top Beverage Stock Picks Right Now: Credit Suisse.)
However, all financial instruments are two-sided animals in which long-term rallies inevitably give way to equally persistent pullbacks, corrections and shakeouts. With that in mind, the dramatic rally since PepsiCo stock bottomed out at $98.50 in December 2016 has reached multi-year resistance that could signal a decline lasting through the balance of 2017 while causing the stock to relinquish 15% to 20% of its total value.
PEP Long-Term Chart (1993 – 2017)
Sleepy price action in the first half of the 1980s gave way to a powerful uptrend that continued into the 1993 peak at $21.82. The stock paused at that resistance level for more than two years, ahead of a breakout that eased into a shallow rising channel in 1996. Price action held within those narrow boundaries into the new millennium, lifting to $53.50 in the first half of 2002.
PepsiCo stock sold off to channel support a few months later and returned to resistance in 2004, breaking out and continuing to gain ground in a low-volatility pattern that rarely challenged new support levels. That uptick finally ended at $79.79 in January 2008, giving way to a mild decline that accelerated during the economic collapse. Selling pressure finally eased in March 2009 at a five-year low in the mid-$40s, ahead of a modest recovery wave that stalled in 2011 in the low $70s. (For more, see: How Does PepsiCo Make Money?)
It took another two years for the stock to complete a round trip into the 2008 high, ahead of a 2013 breakout that tracked a rising channel in place since 2011 (red lines). That pattern continues to control price action more than five years later, with a single quickly repealed violation in August 2015. Ominously for long-term bulls, the rally wave that started at channel support in December 2016 has now reversed at channel resistance.
PEP Short-Term Chart (2014 – 2017)
A 2014 rally wave peaked at $100 in December, generating a decline that posted a fat finger reversal during the August 2015 mini flash crash. Three lows since that time have carved fresh support within a rising channel that has now triggered four reversals at resistance. As we know from the stock's long-term history, this particular pattern can persist for many years, telling informed market players to take defensive action now that resistance has been reached once again. (See also: Pepsi, Coke Have Limited Upside; Dr. Pepper and Cott Undervalued: BMO.)
The stock built a four-week rectangle at channel resistance into July and broke down, but support at the 50-day exponential moving average (EMA) near $115 has stalled the decline. A breakdown at this level will add reliability to a bearish prediction that sets a target at channel support, now located near $105. Prior reversals have averaged five to seven months, setting the stage for weak relative performance into the end of 2017.
The Bottom Line
PepsiCo has emerged as a high-yield market leader, posting a long series of new highs while maintaining a healthy annual dividend. However, the rally that started in December 2016 may have run its course, with high odds for a pullback that eventually finds its way down to support near $105. (For additional reading, check out: Pepsi Has 'Fallen Victim to Media Hype' as Soda Sales Dwindle: Analyst.)
<Disclosure: The author held no positions in the aforementioned stocks at the time of publication.>