PepsiCo, Inc. (NASDAQ:PEP) is a great example of a consumer defensive stock that has outpaced the market since the beginning of the year. When it reports earnings on Thursday, Feb. 13, before market open, I think it will push even higher.
As I mentioned on Friday, I believe the coronavirus situation could still cause investors to panic. Over the weekend, China confirmed that over 900 people have died because of the coronavirus, meaning this outbreak is now more deadly than the SARS outbreak from the early 2000s.
Investors and the financial media have been comparing the coronavirus to SARS as a way of understanding how the new outbreak could affect China’s economy. The fact that this virus has surpassed SARS’s death count created fear that the economic impact could be worse as well.
The S&P 500 opened lower on Monday because of the rising impact of the virus, but it rallied to a new high as stocks like Amazon (NASDAQ:AMZN) and Alphabet (NASDAQ:GOOGL) made big gains.
PEP has been rising in the run-up to its earnings announcement, and its status as a consumer defensive stock makes it particularly appealing when volatility is elevated.
If you are looking for a bullish trade, but you don’t want to take a position on a stock that could drop from another virus-related headline, a call debit spread on PEP could be an excellent addition to your portfolio.
PEP’s Upcoming Earnings
As Will Ashworth wrote last week, PEP doesn’t have a lot of room for error with its upcoming earnings report.
Analysts expect PEP to report earnings per share of $1.44 for the fourth quarter, which would be a decrease from the fourth quarter of 2018.
PEP is also expected to report a 4.4% increase in revenue from the fourth quarter of last year.
The company has a solid history of beating expectations, surpassing both top- and bottom-line estimates in its last two reports, so I expect it to beat expectations again.
The decrease in profits even as revenue rises is concerning, but that has been a trend across the market. With a trade on PEP, you are betting on the appeal of a defensive stock with a strong dividend. Other companies with shrinking margins don’t necessarily have the same strengths.
Breaking Out in January
As John Jagerson and Wade Hansen observed yesterday, defensive consumer stocks have been performing very well since the start of the year. Like Coca-Cola Company (NYSE:KO), PEP has pushed much higher.
In the chart below, you can see that PEP broke above resistance at around $140. When it pulled back in late January, the stock found new support at around $141 per share.
Daily Chart of PepsiCo, Inc. (PEP) — Chart Source: TradingView
Since bouncing off support at $141, the stock has pushed above $145 per share, and if it reports strong earnings, we could see it head even higher in the short term. I am recommending a call debit spread with a lower strike price of $148 because it is a cheap way to take advantage of the situation
PEP doesn’t need to cross $148 for our options to benefit from its bullishness. Any short term push higher could give traders a chance to collect.
Using a spread order, buy to open the PEP Feb. 28th $148 call and sell to open the PEP Feb. 28th $149 call for a net debit of about $0.40.
Note: Be sure you are opening the weekly PEP options that expire on Friday, Feb. 28, 2020.
About Call Debit Spreads
A debit spread is simply a way to lower the cost of buying options, as the option that you sell to open (short) helps offset the cost of the option that you buy to open. Therefore, this call debit spread is a way to lower the cost of buying bullish call options. Many brokers will require the use of margin and/or a set amount of reserved capital to execute a debit spread; contact your broker directly for specific requirements.
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