Managing Editor’s Note: Today, we’re handing the reins over to colleague Larry Benedict – a market wizard and legendary hedge fund manager.
In this essay, he’ll share his findings about a company that may not be a buzzworthy name but has the potential for great gains by the year’s end.
Here’s Larry…
Few things are certain in life – death and taxes often come to mind.
In the current era, you may want to add to that list “tech stocks driving the market higher.”
So far this year, the technology sector is up 20%. The communications sector, filled with Meta, Alphabet, and Netflix, is up 16%.
These are the only two sectors that have outperformed the S&P 500’s gain of 15%.
The strength of these two sectors has allowed the S&P 500 to notch its 30th all-time high so far this year. That’s well above the average of 19 all-time highs a year over the past 50 years.
But the overconcentration of tech stocks in the market’s gains leaves investors vulnerable.
We can tell this by looking at the Relative Strength Index (RSI).
When the RSI rises above 70, the stock may be overbought, and a price correction could be imminent.
When the RSI is below 30, the stock may be oversold, and a price increase could be coming.
Currently, the S&P 500’s RSI is 76, which signifies overbought conditions.
The tech-heavy Nasdaq 100 sits at an RSI of 82, the highest level it has reached in six years.
In these overstretched conditions, you should consider digging into other areas of the market to find bargains.
There are tons of attractive setups across different sectors that may catch up to the market by year-end.
So let’s take a look at a name that has just broken out of a monthlong consolidation. It’s showing all the signs of a stock that’s heading higher.
It’s a boring household staple. But the setup is very exciting…
This Boring Name Could Attract a Lot of Buzz
Colgate-Palmolive (CL) is a juggernaut in the household and personal care products industry.
You likely have a few of its products tucked away in your kitchen or bathroom right now.
The stock has had a great year so far, rising by 20%.
Over the past few weeks, though, it has taken a healthy breather. Yet now signs are telling us that there’s still life in this stock.
You can see what I mean in the chart below:
CL has broken out of a monthlong consolidation.
As you can see, the price of CL has risen above the purple line. That line previously served as a resistance level.
And two classic signals should pique your interest. They could signal more gains to come…
The first is in the moving average convergence/divergence (MACD) section in the middle of the chart.
The MACD line is a momentum indicator. When it crosses above the orange signal line, it’s a bullish signal.
That signal is even stronger due to its position well above the zero line. That confirms the stock is in an upward trend.
The second indicator to watch is the RSI at the bottom of the chart. RSI measures the speed and strength of price movements.
Remember, as I mentioned above, an RSI above 70 suggests a stock could be overbought. And an RSI below 30 hints that the stock could be oversold.
CL’s RSI is currently 66, which means it’s in a sweet spot – above 50 but not yet overbought.
So momentum is strong, but CL isn’t yet at a point where we need to worry about a pullback.
The last time CL broke out of a monthlong base with a bullish MACD and RSI was in late January of this year.
Following the breakout, the stock rose by 5% over the span of five days.
It then went on to rise an additional 6% over the following two months.
So we’re looking at a prime setup for this stock to continue rising.
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All-Around Strength
Outside of its technical attractiveness, Colgate has strong fundamentals. That should only add to our confidence in this name.
On April 26, the company reported Q1 earnings results that blew analyst forecasts out of the water.
It sold 1.3% more products than a year ago – even with a 9% increase in the average price per product.
Colgate is actively proving that its products remain in heavy demand. And consumers aren’t turning away from them in the face of price hikes.
The strength of its Q1 results led the company to raise its 2024 sales forecast by 2 percentage points.
Ultimately, Colgate is benefiting from continued consumer demand. And its stock is looking set to rally further.
If you’re looking for a call option trade, CL could be a triple-digit winner if this setup plays out.
Regards,
Larry Benedict
Editor, Trading With Larry Benedict