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This Breakout Stock Could Deliver Double-Digit Gains By Mid-2013

 January 29, 2013 12:03 AM
 


About a month ago, I recommended traders consider buying Israeli soda-maker, Soda Stream International (Nasdaq: SODA). At the time, the stock was trading around $40.50. Shares have since soared to about $52.70 for a 22% gain in a few short weeks.

I've now spotted another international beverage company that has equally strong potential to bring traders double-digit returns in a short time. The stock is of Mexican beverage firm, Fomento Economico Mexican (NYSE: FMX), or FEMSA.

[Related -The Latest Stock Buys And Sells From Bill Gates]

It is the holding company for a number of profitable food and beverage operations, including Coca-Cola FEMSA, of which it owns more than a 50% stake. Coca-Cola FEMSA is the world's largest bottler of Coke products with 37 bottling plants across nine countries in Latin America. Having a major stake in Coke products is good news for the Mexican holding company. On a per capita basis, Mexicans are the world's largest consumers of Coca-Cola.

FMX also has the beer industry covered. The company owns a 20% stake in Dutch brewer, Heineken.

And for those who get the late-night munchies after a few too many drinks, they can head to Mexico's largest and fastest growing convenience store chain OXXO -- also operated by FMX.

[Related -Forget Coca-Cola: Buy This Stock Instead]

There are currently about 1,000 OXXO convenience stores in Mexico. In the third quarter of 2012, the company opened 178 new stores. In the coming years, FMX plans to continue aggressive expansion, opening about 1,000 new outlets per year.

FMX's stake in the food and beverage markets gives it exposure to the consumer and retail sectors. Just recently, the company expanded its repertoire even further. In November, FMX bought a 75% stake in the leading Mexican pharmacy business, Farmacias YZA. The deal is expected to be finalized in the first quarter of 2013. The addition of the drugstore chain should present new growth streams for FMX.

With a diverse business model, in several revenue-generating sectors, FMX looks like a resilient, recession-proof stock that should bring shareholders gains well into the foreseeable future.

At present, the stock is on a tear.

Shares have been on a major uptrend for the past two years. In early 2012, the stock traded around $66. Since this time, shares have formed an accelerated uptrend line and have almost doubled to date. The stock is currently trading about $1 from its all-time high near $109.

In November, shares broke through a small shelf of resistance near $97.34. In the process, they bullishly broke an ascending triangle pattern. During November and December, the stock continued to rise.

Shares encountered slight resistance around $102, but did not stall for long. In early 2013, the stock blasted past $102 resistance, bullishly breaking a second small ascending triangle in the process.

Shares have been unstoppable ever since. With no historical resistance in sight, the stock could surge. According to some industry analysts, FMX could go as high as $121. At current levels, this target represents 12% returns.

The bullish technical outlook is supported by strong fundamentals. Due to increasing product demand, driven by Mexico's growing middle class, analysts' expect the company's revenue in the fourth quarter of 2012 to rise 3.1% to $4.3 billion from $4.2 billion in the comparable year-ago period. For full-year 2012, revenue is expected to increase 28.6% to $18.8 billion from $14.6 billion last year.

The earnings outlook is similar. In the next five years, the company's income is expected to increase by 14.3%. In the shorter term, earnings in the fourth quarter of 2012 are projected to rise nearly 18% to $1.27 from $1.08 in the comparable year-ago period. With rising product demand, analysts expect full-year 2012 earnings will increase 23% to $3.72 compared with $3.03 last year.

In addition, the company offers a reasonable forward annual dividend of about 1.3%, or $1.40 per share.

Given the strong fundamental outlook, backed by bullish technicals, I plan to go long on the Mexican beverage company.

Risks to consider: FMX is the world's largest bottler of Coca-Cola products. Rising raw materials and packaging costs could impact the company's future profit margins. However, to compensate for increased material costs, FMX could likely marginally raise prices without alienating consumers. The company is well diversified and should continue to grow into the foreseeable future.

Action to Take --> Buy FMX at the market price. Set stop-loss at $101.97, slightly below current support. Set initial price target at $121 for a potential 12% gain by mid-2013.

-- Deborah O'Malley

(Note: My colleague Amber Hestla of ProfitableTrading.com has put the finishing touches on a report that answers ten commonly-asked questions about boosting income with options. If you'd like learn more about generating income using options, simply click here and tell us where to send the report.)

Deborah O'Malley does not personally hold positions in any securities mentioned in this article. StreetAuthority LLC does not hold positions in any securities mentioned in this article.
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