Kellogg

2/18/12
It’s been a great run so far in the markets this year, and while I expect a 60 point pullback in the S&P at some point in the near future, I would look for this market to continue it’s upward bull trend as long as the European situation continues to improve.  Having said that, a big part of everyone’s portfolio should be a handful of high quality, high dividend paying stocks.  In this market, I recommend going to about 20-30% income, and part of that should contain my stock of the week, Kellogg (K).  Among its’ many products including various cereals are, Famous Amos cookies, Keebler snacks and Cheez-Its.  On February 15, Kellogg added a game-changing product to their lineup with the purchase of Pringles from Proctor & Gamble. 

While the techincals look very bullish (more on this later), what really attracted me to this stock is the fundamental story.  Kellogg comes with a nice 3.30% dividend and trades at a cheap forward looking multiple of just 13.9x 2012 earnings.  With a PEG ratio of under 2 (a healthy indicator that the stock price isn’t growing too fast), Kellogg looks even cheaper.  On February 2^nd, Kellogg reported their FY11 earnings that were very strong and exceeded analyst expectations, while affirming 2012 guidance.  For 2011, they reported sales of $13.2B, an increase of almost 7% over 2010 and net earnings were up 2.4% to $3.38/share.  Kellogg expects full year 2012 earnings to continue to grow by 4-5% citing a strong, innovative product pipeline and increasing margins due to higher prices. 

While the stock is down almost 1.5% for the past 52 weeks, the stock has been rising steadily since putting in a new 52 week low in late November, up 10% since that time.  While you may think that 10% isn’t that great, you need to keep in mind that Kellogg pays almost 3.5% just to hold the stock.  Now, what’s great about this stock is that it’s put in a clear-cut bottom at the 52 week low of $48.10 on November 29 of last year.  The move confirmed a 5^th wave down on a daily and weekly chart, but the bottom of the 4^th wave, in a 5^th wave up on a monthly chart.  The monthly chart also confirms an inverted head-and-shoulders built since 2008, that was rechecked by that low on November 29. 

The day that Kellogg announced their acquisition of Pringles, the stock gapped up almost 5%, putting in a low of $51.93, just $0.16 above the 38.2% Fibonacci retracement to close at $52.87, just $0.03 off the 50% retracement.  If that isn’t evidence enough that the stock shouldn’t falter much lower than the 38.2% retracement, Kellogg traded at a low on Friday of $51.86, only to rally and close at $52.53, a good entry price for this stock.  There’s a long-term downtrend line that Kellogg is poised to break through at $52.99.  Kellogg has been trading on a 50% increase in daily volume over the last ten days, and I expect volume to continue to be strong. 

As I said, you can enter a buy order for this stock on Monday morning and use a stop loss at $50.37 for small loss.  I am looking for a long-term (Dec 31 at the latest) price target of $60, which would be about a 15% return, excluding dividends.  Being an income stock, you need to have patience and hold for the year to get these solid returns. 

Full disclosure:  I currently am long K from $52.02 and plan to buy more as the stock breaks through its long term downtrend line. 

Jeff Lewison