A Safe Trade for a Quick 12.5% Gain

Some traders may be hesitant to buy a stock that’s just hit a new all-time high. But personally, I hunt for these types of trades because they often represent low-risk/high-reward opportunity. Often, stocks trading at new highs continue to advance because there’s no historical technical resistance in sight.

That’s why I’m excited about my latest stock showing these characteristics: soft drink-maker Dr Pepper Snapple Group (NYSE: DPS).

#-ad_banner-#Not only has the stock just broken out of an ascending triangle formation — a bullish technical pattern — it is also trading at a new all-time high. The opportunity to get in on the stock may be limited because the share price may soon, so to speak, “pop.”

What’s fueling Dr Pepper’s growth?
For starters, the Texas-based company, which operates primarily in North America, has increased its product distribution efforts and availability. It’s also introduced a number of popular new beverages, expanding its Sun Drop product line. The company now offers more than 50 beverage choices, under iconic brand names like 7-Up, A&W, Crush, Sunkist, Canada Dry, Hawaiian Punch, Schweppes and, of course, Dr Pepper and Snapple. 

Although the company has a small presence in developing countries in comparison to its multinational rivals Coca-Cola (NYSE: KO) and Pepsi (NYSE: PEP), international sales volume is on the rise, especially in regions like Latin America. Furthermore, the opportunity to penetrate developing nations presents a tremendous growth opportunity.

Even with rising ingredient and fuel costs, Dr Pepper Snapple Group has managed to maintain margins. To compensate, the company has increased operating efficiency, implemented cost savings and raised prices.

The formula seems to be working. The technical picture for Dr Pepper Snapple is very bullish.

During much of 2009 and 2010, the stock was in a Major uptrend, rising from a low of $19.10 in May 2010, to the high $37-range by late-2010.

However, in December 2010, the stock stalled, breaking its Major uptrend line and falling to support around $33.30. In early February 2011, the stock began rising off support and has been in an Intermediate uptrend since.

During the May 9, 2011 trading week, the stock bullishly broke out from the upper part of a resistance zone, formed around the $37.75-$39.89 range. In pushing above resistance, the stock bullishly completed an ascending triangle formation. It has also managed to penetrate and stay above the psychologically-significant $40 level.
Dr Pepper Snapple is now trading at its highest price since it was spun-off in 2008 by Cadburry PLC (now owned by Kraft NYSE: KFT)).

With no historical resistance in sight, the stock could soar. According to the measuring principle, which is calculated by adding the height of the triangle to the breakout level, the stock could easily reach a minimum price target of $46.33 ($39.89 – $33.45 = $6.44; $6.44 + $39.89 = $46.33), representing a gain of at least 12.5% from current levels.

In addition to technical strength, Dr Pepper Snapple is also fundamentally appealing.

In late April, the company reported better-than-expected first-quarter 2011 results. Due to a 1% increase in total sales volume, driven primarily by growth in Mexico and the Caribbean, revenue rose 6.4% to $1.33 billion, from $1.25 billion in the first quarter of 2010. Analysts expected revenue to only increase 4.8%, to $1.31 billion.

For full-year 2011, the company gave optimistic guidance, stating that it expects revenue to increase in the range of 3-5% to $5.8-$5.9 billion from $5.6 billion a year ago. By 2012, analysts’ project revenue will increase a further 3.4%, to $6.1 billion.

In the first-quarter of 2011, the company was able to offset rising fuel, packaging and commodity costs by expanding its product line and increasing productivity. As a result, first-quarter earnings rose 28.1% to $0.50 from $0.35 in the year-ago period. According to FactSet research, analysts expected earnings of just $0.46.

With growth expected to continue, the company projects full-year 2011 earnings will rise at least 12.5% in the range of $2.70 to $2.78, from $2.40 last year. By 2012, analysts project earnings will increase a further 11.1% to $3.

DR Pepper Snapple also offers an annual dividend yield of about 2.5%.

Action to take –> Dr Pepper Snapple is technically strong and shows solid revenue and earnings growth potential. My minimum price target is $46.33, representing a gain of at least 12.5% from current levels.

P.S. — Few investors realize that a 20-year energy agreement between the United States and Russia is about to expire. This deal supplies 10% of America’s electricity. As broke as our government is, the situation is so serious that President Obama is asking for $36 billion to avert this crisis. And Republicans support him. Here’s what’s going on…