Paper Packaging stocks have been a mixed bag in 2014. Names like Rock-Tenn Co (RKT) and Avery Dennison Corp (AVY) have struggled in recent months, while others like Graphic Packaging Holding Co (GPK) and MeadWestvaco Corp (MWV) have excelled. Right in the middle of the pack this year is Paper Packaging Corp of America (PKG), though the stock has a set of attractive characteristics that make it a convincing buy this afternoon.
Though it hasn't been superb so far this year, PKG had an incredibly consistent up-trending period from June of 2012 to its peak in March of this year. After over a year and a half of marching straight up, PKG has finally shown some consolidation over the past few months, which can be viewed as healthy for a high flying stock after such a run.
One thing I like right off the bat about PKG is that the open gap dating back to February 12th was finally closed in late April. The gap up was caused by a great Q4 earnings report, though general market weakness and technical traders pushed PKG down to fill it over the course of the next two months. Since the gap was filled in the last week of April, PKG has based at $66 and appears to be on the upswing again.
Looking at PKG on a weekly basis, despite the recent consolidation phase, the stock's long-term up-trend is still firmly intact. I like that PKG is also maneuvering above its major short-term moving averages in the short-term, and is approaching the overbought stochastic, both indicating that buyers are stepping in at current prices.
Assuming $66 is the short-term base, the next overhead resistance point for PKG is up just above $72, where it failed in early April. Given the explosive nature of the stock and its long-term propensity to move higher, it seems like a good bet to assume PKG will rise back above $72 as long as it can hold its short-term support at the gap fill price ($65.30-ish).
From current prices, a move up to $72.35 would produce a gain of +7.18%. Should PKG falter and close below $65.30, the risk here is a -3.25%. Thus, the reward outweighs the risk by over 2 : 1.
There isn't a whole lot to this trade. On a weekly basis, we're taking a shot on a long-term up-trending stock that has pulled back in a technically sound manner. I don't think a run back to $72.35 is greedy or particularly risky, despite PKG's high-flying nature. It's comforting that the consolidation since early March hasn't been due to company specific news or lackluster earnings (PKG recently reported decent figures during their Q1 announcement on April 22nd), and the technical set-up is shouting "buy" here.
Price: 67.55 Stop: 66.56, Loss: 1.5%
Target T1: 71.85, Profit: 6.4% T1 P/L ratio: 4.3 : 1 (Excellent)
Target T2: 73.41, Profit: 8.7% T2 P/L ratio: 5.8 : 1 (Excellent)
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