I love Mountain Dew, I prefer drinking Pepsi to Coke, and Frito's are probably my favorite chip, but still, I can't recommend chasing PepsiCo (PEP) stock today. The company turned in a solid earnings report Tuesday before the bell. Earnings per share of $1.54 landed four cents ahead of estimates with revenue of $16.45 billion a rounding error ahead of analysts' expectations. Revenue grew organically by 4.5% with North America the strongest segment of the business led by Frito-Lay.
Nothing about that is negative, but the company did not raise its full-year guidance after the Q2 beat. Soda sales continue to not impress, and despite the Quaker Foods division turning in its best performance in some time, it wasn't a "wow" and I'm not sure it will last. Pepsi has done well with its sparkling water, and the marketing around Mountain Dew continues to be strong, so there are solid takeaways. The 3% yield will continue to draw some income investors, so maybe my pause isn't warranted fundamentally. In fact, I don't think it is, but I do worry about the current technical setup.
PepsiCo needs a weekly close over $135, plain and simple. We have a stock losing the entire 2019 uptrend support line putting it on target to retreat to $125 - $127.50. It is possible we are forming a bullish flag here, but even if that were the case, the play is to buy the breakout above $135, not to guess the bottom level of the flag. It might be $131 or it might not. We simply don't know. Additionally, the bearish crossover of the Full Stochastics indicator, while in overbought territory, is a red flag. This happened in August 2018 and led to two months of struggles and a 10% decline. A similar bearish crossover is present in the Chaikan Oscillator as well.
I do think PepsiCo is an interesting core name to own, especially in a blended portfolio. The company is spitting out $5 billion in dividends along with $3 billion in buybacks, which amounts to a little more than 4% of the market cap, but I wouldn't chase. At the very least, investors should get a shot in the mid-$120s, so I would wait for those levels or a breakout above $135. The here-and-now should be renamed the sit-and-wait.