PepsiCo, Inc. (PEP) fell 2% to a three-month low on Thursday despite beating fourth quarter 2020 top- and bottom-line estimates, posting a profit of $1.47 per share on a healthy 8.8% year-over-year revenue increase to $22.45 billion. The beverage and snack giant now expects a mid-single-digit increase in organic revenue and high-single-digit increase in core constant currency earnings per share (EPS) in 2021. The already respectable $4.09 annualized dividend was raised to $4.40, marking the 49th consecutive annual dividend per share increase.

Key Takeaways

  • PepsiCo sold off to a three-month low after posting strong fourth quarter 2020 earnings.
  • High-yield and defensive plays have fallen out of favor in 2021.
  • The stock has dropped 9% since late December.
  • Downside into the $120s could offer a low-risk long-term buying opportunity.

The company hasn't missed consensus estimates in the past five quarters, but shareholders still hit the exits, with defensive and high-yield plays out of favor in this momentum-fueled, growth-oriented market. Rising bond yields have also undermined interest in these equities, which have been slumping all across the board. Even so, PepsiCo has rewarded shareholders with consistent profits in the past decade and should outperform when the current advance runs out of steam.

Pandemic snacking underpinned fourth quarter results, with healthy sales of drinks that include Gatorade and Bubly sparking water. Frito-Lay North America revenue grew 5% during the quarter, fueled by strong Tostitos and Cheetos sales. The company dodged controversy ahead of the release, rebranding the Aunt Jemima product line to The Pearl Milling Company, admitting the former homemaker was based on a racial stereotype.

Wall Street consensus is mixed, with an "Overweight" rating based upon eight "Buy," one "Overweight," ten "Hold," and one "Underweight" recommendation. No analysts are recommending that shareholders close positions and move to the sidelines. Price targets currently range from a low of $135 to a Street-high $167, while the stock has opened Friday's session at the low target. This humble placement exposes the lack of broad-based interest during this bull advance. 

Tip

A defensive stock is a stock that provides consistent dividends and stable earnings regardless of the state of the overall stock market. There is a constant demand for their products, so defensive stocks tend to be more stable during the various phases of the business cycle.

Pepsico Weekly Chart (2013 – 2021)

Chart showing the share price performance of PepsiCo, Inc. (PEP)

TradingView.com

The stock topped out at $79.79 in 2008 after a multi-year uptrend and fell to a six-year low in the mid-$40s during the economic collapse. It finally completed a round trip into the prior high in 2013, setting off an immediate breakout that stair-stepped to higher ground in between notable downdrafts in 2015, 2018, and 2020's pandemic decline. Gains have tracked a broad rising trendline during this period, with current resistance around $160.

Price action recouped nearly 80% of losses into April 2020 and eased into a consolidation that added points at a snail's pace into December, when the stock completed a round trip into the first quarter peak. A breakout failed after posting an all-time high at $148.77 during the last week of the year and rolled into a pullback that has now relinquished about 9%. The 200-week exponential moving average (EMA) at $124 looks like a logical downside target, narrowly aligned with the .50 rally retracement level.

Fortunately for bulls, the weekly stochastic oscillator has dropped into the deepest oversold reading since April 2018, suggesting that price action is nearing a selling climax. In turn, that could signal a low-risk buying opportunity for investors willing to hold for one to two years at a minimum, collecting dividends while waiting for a risk-averse tape to return to the market.

Tip

Consolidation refers to an asset oscillating between a well-defined pattern of trading levels. Consolidation is generally interpreted as market indecisiveness, which ends when the asset's price moves above or below the trading pattern. A consolidation pattern could be broken for several reasons, such as the release of materially important news or the triggering of a succession of limit orders.

The Bottom Line

PepsiCo has sold off to a three-month low despite strong fourth quarter 2020 metrics and bullish guidance.

Disclosure: The author held no positions in the aforementioned securities at the time of publication.