A Low-Risk Way to Profit in an Overvalued Sector
With the NFL football season kicking off this week, I took a look at publically traded brewing companies and found that many of them have stocks that seem to be overvalued. Many, but not all...
One brewer I came across not only is significantly undervalued relative to its peers, but also has a bullish chart pattern. The stock appears set to break out, and traders who buy now could see some nice gains by the time the Super Bowl rolls around.
Heineken (OTC: HINKY) is trading at forward price-to-earnings (P/E) ratio of 10 in an industry where the average P/E ratio is more than 23.
With earnings expected to grow by more than 11% a year, Heineken has a price/earnings to growth (PEG) ratio of 0.91. The industry average PEG ratio is about twice as high at 1.8. Value investors like to see a PEG ratio of 1 or less. This could make Heineken attractive to long-term investors and increase the demand for the stock.
Turning to the chart, Heineken looks like it's ready to break out. The stock trades on low volume so there are a number of gaps on the chart, but the general outline of a cup-and-handle pattern can be seen on the daily chart below.
The top of the pattern, first reached in March, is near $28, and the low of $23.16 was reached in May. That is a depth of $4.84, which can be added to the top of the pattern to obtain a price target of $32.84, a potential gain of 16% from the recent price of $28.25.
Patterns often reach their price targets in about the same amount of time that it took the pattern to develop. If that holds true for this cup-and-handle pattern, then the stock should reach this target within six months.
If Heineken falls below the gap seen near $25 that could be a signal that the price trend has changed direction and the stock is likely to continue to fall. That makes $25 a good stop level for this trade. Because volume is fairly low in Heineken, traders should consider using a limit order to enter and exit the trade.
Action to Take --> Buy Heineken at $28.25 or less. Set a stop-loss at $25. Set initial price target at $32.84 for a 16% gain within six months.
This article originally appeared on TradingAuthority.com:
StreetAuthority LLC does not hold positions in any securities mentioned in this article.