Little-Known Food Stock on the Verge of a Big Rally

Studies have shown that a large portion of a stock’s gain can be attributed to the sector it is in. With that in mind, the food products group is now outperforming the market, and the Dow Jones U.S. Food Products Index recently broke out to a 52-week high.

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Within that group is Hershey (NYSE: HSY), which I highlighted last week. Also represented are cereal makers Kellogg (NYSE: K) and General Mills (NYSE: GIS). Both of these brand-name stocks have already scored technical breakouts of their own.

Today, I want to highlight a little-known food company that is just starting to make a move higher — Flowers Foods (NYSE: FLO).

The company makes and markets bakery products, including the Nature’s Own, Wonder and Tastykake brands.

What initially put Flowers Foods on my radar screen was the failed rebound attempt in wheat prices. The commodity is now back down near 52-week lows.

Beyond the fundamentals of falling input prices, FLO sports a chart with a fledgling technical breakout and is supported by strong sector performance even as the broader market struggles.

FLO Chart

The technicals are not fancy. On-balance volume during the May-to-July decline was flat instead of falling, indicating that demand did not waver. It was just waiting for the right time to surge.

Last week, the stock moved cautiously above the upper border of a small falling trend channel. And on Tuesday, FLO jumped more than 1% and blasted through its 50-day moving average.

I want to take a moment to talk about the construction of the trend channel. Often, when the channel is clear to the eye and the traditional method of connecting interim price highs does not seem to work, it is possible to draw a line through the interim lows instead. A parallel line drawn above the price action can then be used as a resistance feature. It may seem backward, but we are simply trying to describe the action so we will know when the downtrend turns into an uptrend.

It seems the path is now clear for a run back to the stock’s all-time highs in the $25.50 area. That would be a 15%-plus gain and admittedly a little aggressive in the current market, which seems shaky. However, there is no law that says we cannot bail out early when the technicals dictate with falling momentum or demand.

A move to the $24.50 area, which is between the twin 2015 highs and the all-time high set in 2013, might be a more attainable goal and would still result in a gain of 12%. 

In summary, we have a stock in a leading group that is just now breaking out to catch up to some of its peers. Despite a shaky market, consumer staples stocks like FLO can provide safe havens thanks to their more reliable earnings through good times and bad.

One more positive is the company’s dividend. Management recently increased the quarterly payment by nearly 10% to $0.145, which throws off a current annual yield of 2.6%. The stock will likely go ex-dividend at the end of this month, but you could collect an immediate dividend when you purchase shares simply by doing this.

Recommended Trade Setup:
— Buy FLO at the market price
— Set stop-loss at $21.25
— Set initial price target at $24.50 for a potential 12% gain in 10 weeks