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Yola Edwards

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The chicken or the egg

Yola Edwards

 

To combat escalating grocery bills investors should look back to the past at farming and consider shares of Sanderson Farms Inc., a fully-integrated poultry processing company engaged in the production, marketing and distribution of fresh and frozen chicken products to retailers, distributors and fast food operators in the southern and western United States. Although escalating feed-grain prices have pushed the cost of producing a live chicken up by 65 per cent over the past two years, producers believe seasonal demand during the July-August barbeque season will more than offset squeezed profit margins.

Technically, the share price appears to be in the final stages of completing a 4-year old bullish inverted head and shoulders pattern. The pattern is very slow to unfold until it vaults over the neckline resistance, so patience is required. Added to the bullish posture, the longer-term moving averages (MA) are positive with the 20-week MA issuing a buy signal as it recently crossed up over the 41-week MA. The stock has also traded above the upper overbought Bollinger band several times recently, which usually indicates higher prices ahead. However, short-term daily indicators (not shown), such as the Relative Strength indicator (RSI) and Moving Average Convergence/Divergence Oscillator (MACD) have registered an overbought reading and a sell signal. A pullback to the 10-week MA at about $41.60 (U.S.) would offer a buying opportunity.

A close above $48 would be a clear upside breakout above the pattern's neckline resistance area suggesting a potential rally to the pattern's technical target measurement of $73.80 over the ensuing six months. Be advised though that daily trading volume is low as there are only slightly more than 20 million shares outstanding. With the stock currently trading at $45.34, it trades at 10.5 times current earnings. Company officials will report second quarter earnings on Thursday May 22.

However, if you're a frozen foods connoisseur then Sadia SA ADR's might suit. The Brazilian company is one of the world's leading producers of chilled and frozen food with a product line which includes pork meat, cooked meat, poultry cuts, sausages, margarines, pizzas, soups, desserts and pasta. Offices are located in Germany, Russian, Japan, China, Turkey, Argentina, Chile and Panama, among others.

The stock has been a star performer vaulting over 360 per cent over the past three years. With about 228 million shares outstanding, the share price trades at 15.3 times forward earnings, which is in line with other stocks in the category, however technical charts indicate the stock appears ready to thaw out at current prices so look to buy it on sale.

An extended third advancing wave has just completed and although the MACD is still issuing a buy signal on a weekly basis, it is overbought. The RSI has diverged negatively and the lower Bollinger band has turned down, thus both indicators suggest a pullback. Initial support should be found at the 10-week MA at about US$20.42, but if that doesn't hold a move down to about $18 at the 20 and 41-week MA should provide major support. A fifth wave rally would then vault the stock to about $26.43 over the ensuing six months.

Yola Edwards is a contributing writer and technical analyst for Bell Globemedia Interactive, providing options and technical analysis research on a variety of North American equities.

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