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Back in August, I did something I rarely do here in Money and Markets … I profiled a specific stock, one that was currently in the Dividend Superstars portfolio.
The company was Colgate-Palmolive, and I’m happy to report that it remains in the portfolio today. After all, it continues to go higher and higher — I’m currently tracking an open gain of 35 percent based on my initial recommendation to buy the shares back in March, not including the dividend payments.
Today, I want to give you an update on what’s been happening with the stock, and to use it as an example of why I rely on basic technical analysis measures to forecast a stock’s near-term price movements.
But I’m getting ahead of myself …
Let’s Start with Four Fundamental Reasons
for Investing in Stocks Like Colgate-Palmolive
Before I recommend a stock, especially for an income-oriented portfolio, there are some basic things I look for:
First, a business that is clearly defined and easy to understand. Colgate-Palmolive makes toothpaste, soap, and other goods that consumers pile into their shopping carts on a weekly basis. Pretty straightforward, right?
Sure, we’re talking about a multinational corporation with complex financial statements. Its businesses are impacted by foreign exchange rates, commodity costs, competitor’s pricing and advertising efforts, etc. But at its core, it’s fairly easy to grasp what the firm does. And its business is focused.
That’s what I like to see!
Second, a business or brand that is defensible and long-lasting. Again, I like companies that sell products (or services) that the world wants through thick and thin. Especially if those markets are hard for other competitors to enter … either because of established brands or massive upfront investment.
Nobody will deny the massive appeal of a brand like Colgate. It’s been around forever, and is recognized universally!
Third, operations around the world. I won’t completely rule out a company that operates in only one very targeted market or country. But nowadays, I feel far better about firms that sell their products and services in a number of different places. By doing so, they are less exposed to economic problems in one region. Plus, at a time when the U.S. dollar is getting hammered, they can actually benefit investors by translating their foreign sales back into a weaker home currency.
Colgate, for example, derives about 70 percent of its sales of oral, personal and home care products outside the U.S.
Fourth, a management team that spreads the wealth! I say it a lot, but it bears repeating again — as a shareholder, you are an owner of a company. And therefore, you deserve your fair share of the profits in the form of dividend payments. Moreover, I consider companies that pay steady dividends — and increase them in lockstep with business growth — an investor’s best shot at accumulating true wealth.
In the case of Colgate, we’re talking about a company that has paid dividends for 115 years straight, with 46 consecutive years of increases!
Of course, fundamentals are only part of the picture. They help you determine what companies are worth targeting, but they don’t necessarily tell you when it’s the best time to buy.
That’s why I also use basic chart analysis just to get a sense of how a given stock is acting.
I want to stress that — for me — this is a far less important aspect of my process than looking at the fundamentals. But I also recognize that in the volatile markets we have right now, it makes sense to look at every possible piece of information available. And in the case of CL, basic chart analysis has been quite revealing …
Let’s Look at My August Analysis of Colgate’s Chart
And What Has Taken Place Since Then …
In that August Money and Markets column, I showed you the following chart …
A few of my comments at the time:
“In my opinion, it’s a case of ‘too far, too fast’ … and everyone is simply using the earnings release as a reason to take the stock down a notch or two …
“Therefore, I think a retracement is natural and nothing to worry about.”
Now, here’s what Colgate’s shares have done since that original column in August …
As you can see, the shares held firm in the low $70s … attracted new investors … and then took off on a two-tiered rally good for a gain of about 10 percent. They now stand near a new high.
How could you have foreseen this move? Why wasn’t I worried that the pullback would bring the shares back down to much lower levels?
Just look back at the original chart above and you’ll get the answer.
That simple red trendline I drew indicated that the shares were moving very strongly to the upside, but had run ahead of themselves. I figured a retracement back down near — or even a bit below — that rudimentary trendline would be a positive … and would set the shares up for a renewed move upward … along the same general trajectory.
More importantly, it was fairly obvious that the fundamentals confirmed this: As I noted in my original column, investors were selling off the shares over a minor detail and ignoring the wealth of positive information contained in the company’s second-quarter earnings release.
From a forecaster’s perspective, it doesn’t get any better than having the technicals and fundamentals in complete agreement.
So where might the shares go from here?
At this point, I see two big fundamental catalysts on the horizon …
#1. Colgate’s third-quarter earnings report, which is going to be released on October 29. Obviously, these numbers will be critical. And investors will be particularly focused on whether sales — and not just profits — posted an increase.
#2. The overall market’s direction. Even if CL posts a great quarter, I don’t think the stock will be able to continue its strong rise without a continued market rally. So it will be important to monitor not just Colgate’s results … but what other companies are saying, too.
In short, I don’t think now is the right time for anyone to load up on additional shares. But if you’ve been holding them for any length of time, enjoy those open gains … and the steady dividend checks for now.
And if you’re a Dividend Superstars subscriber, be on the lookout for more detailed instructions on what to do with your CL shares (as well as all your other positions). With another critical earnings season getting underway right now, I’ll be watching market developments very closely. If I see anything that warrants action, I’ll let you know!
Best wishes,
Nilus
P.S. If you’re not yet a Dividend Superstars subscriber, what the heck are you waiting for? Try it out risk-free today! The recent stock market gains have been terrific … and by buying solid dividend-paying shares you are also setting yourself up for far better income than you’d get from other investments like CDs, money markets, and Treasuries! Click here for all the details.
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Money and Markets (MaM) is published by Weiss Research, Inc. and written by Martin D. Weiss along with Nilus Mattive, Claus Vogt, Ron Rowland, Michael Larson and Bryan Rich. To avoid conflicts of interest, Weiss Research and its staff do not hold positions in companies recommended in MaM, nor do we accept any compensation for such recommendations. The comments, graphs, forecasts, and indices published in MaM are based upon data whose accuracy is deemed reliable but not guaranteed. Performance returns cited are derived from our best estimates but must be considered hypothetical in as much as we do not track the actual prices investors pay or receive. Regular contributors and staff include Kristen Adams, Andrea Baumwald, John Burke, Amy Carlino, Selene Ceballo, Amber Dakar, Dinesh Kalera, Red Morgan, Maryellen Murphy, Jennifer Newman-Amos, Adam Shafer, Julie Trudeau, Jill Umiker, Leslie Underwood and Michelle Zausnig.
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