Procter & Gamble (PG) has historically had a simple value proposition to investors - great blue-chip stock at a good price, predictable earnings (and dividend) growth. Increasingly, PG has become a two-sided argument - the bullish side about value, and the bearish side about consumer spending. The contrast between the two sides is not more apparent than the news flow today. So what are the bullish and bearish arguments, and which way should you swing? Before I get to the last part, here's the bearish thesis (courtesy of Zacks) and the bullish (courtesy of value investor Bill Ackman).
Zacks' bearish thesis rests and dating downgrade of PG to underperform rests on the following points:
- Recent lowering of 2012 sales and earnings outlook (second successive guidance cut in the last 2 months)
- Sluggish market share growth in the developed countries and China, and foreign exchange headwinds.
- Rising commodity costs are hurting the company's margins.
- Other short-term headwinds include business disruptions in Venezuela, import restrictions in Argentina and negative impact of foreign exchange
On the bullish side, you have the reported investment in PG by famed value investor Bill Ackman, which drove PG stock to a 3.5% gain on a down day for the S&P and Dow. Bill Ackman isn't a day trader, but he has made substantial sums of money on such stocks as J.C. Penney (JCP) in the past.
Click to enlarge.
So which side should one believe, one might ask? And my answer - both. While Ackman's long bets are hard to argue with, there is no fundamental reason why PG should have gone up from $60 and change a few days ago to $64, especially when Warren Buffett is out saying that Europe is worse than expected. The one year chart suggests that there is technical support at $61 and better yet $59, prices that should discount some of the European and Emerging Market malaise.
The bulls might argue that there is upside to $67-68, but remember that those highs were made during the extraordinarily sanguine periods from January to April 2012. The rest of the chart indicates resistance at between $64 and $65 (where the stock is currently trading).
In my opinion, PG is a good short for the brave, but going long will fetch you very little. Given Mr. Market's worries and Buffett's view of Europe, I expect that you'll have a shot at PG in the $59 to $61 range within the next few weeks. And at that point, it would be a risk worth taking with the conservative to moderate portion of your holdings.
Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.
Additional disclosure: This article is most effective if published in the next 24 hours
