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Monday, September 10, 2012 - 06:00
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Monday, September 10, 2012 - 06:00

A Low-Risk Way to Profit in an Overvalued Sector

Monday, September 10, 2012 6:00 AM

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:

A Low-Risk Way to Profit in an Overvalued Sector

Amber Hestla does not personally hold positions in any securities mentioned in this article.
StreetAuthority LLC does not hold positions in any securities mentioned in this article.