Buy This Blue Chip's Breakout for Potential 25% Returns

With the Republicans agreeing to continue fiscal negotiations, and potentially agreeing to both a six-week extension on the debt limit and discussions on opening the shuttered government, pressure may be off stocks… temporarily.

As a result, I remain cautiously optimistic. As I did last week, I am seeking out defensive blue chips with steady revenue and profit growth that have attractive dividends and strong charts.

International delivery company United Parcel Service (UPS) fits this bill. Offering a 2.7% forward dividend yield, the iconic brown and gold package deliverer sports a healthy chart and an optimistic outlook.

Growing demand from health care customers has helped drive recent expansion. During the second quarter, UPS opened two new facilities dedicated solely to health care distribution. One was in Louisville, Ky., the other in Hangzhou, China. With these additions, UPS now has over 6 million square feet worldwide dedicated exclusively to distributing health care packages.

Expansion in Costa Rica should also help the company going forward. In early September, UPS announced the purchase of two small Costa Rican package delivery companies, Union Pak de Costa Rica and SEISA Brokerage. These additions are expected to facilitate easier package delivery while enabling UPS to tap into the country's steadily growing economy. According to the IMF, Costa Rica's import and export growth is expected to increase an average of 7% annually over the next five years.

UPS' expansion into China will also likely drive future growth. According to the World Bank, China is the world's largest manufacturer and exporter. At present, China is the world's second largest economy; however, by 2030 China is projected to take to No. 1 spot.

Targeting China's growth, this summer, UPS added two new Chinese logistics facilities, one in Shanghai and the other in Chengdu. With these additions, UPS now has over 130 Chinese distribution facilities across 87 cities. The new buildings are part of UPS' attempt to develop a national distribution network across China, strengthening overall international operations.

Shareholders certainly seem optimistic about the company's expansion plans.

UPS Stock Chart
UPS Stock Chart

Rising off a November 2012 low, shares have formed a major uptrend and have risen over 30% to date.

In May, UPS hit a high near $89, but stalled at this level. From May through September, the stock traded in a narrow range between support near $85 and resistance near $89. This trading activity created a holding pattern known in technical analysis as a rectangle.

In early September, shares bullishly broke through resistance and out of the rectangle pattern, hitting an all-time high of $92.12. In the process, the stock also bullishly broke out of an ascending triangle, formed by the intersection of the major uptrend line and $89 resistance, which now acts as support.

Over the past few weeks, shares have retreated slightly. As long UPS stays above $89, the technical outlook is bullish. This level is critical for two reasons. First, $89 was a resistance level between April and September, and this resistance should turn into new support. Second, the major uptrend line passes through the chart at $89. 

If this support holds, the shares are again likely to challenge current resistance at the $92.12 peak. If this level is exceeded, shares could soar with no historical resistance in sight.

My strategy will be to keep my powder dry and only buy the stock on a breakout above resistance. Some analysts project the stock could reach a price target as high as $115. If bought above $92.12 resistance, traders could see nearly 25% gains with very limited downside risk.

The bullish technical outlook is supported by strong fundamentals.

For the upcoming third quarter, scheduled to be reported Oct. 25, analysts project revenue will increase 4% to $13.6 billion from $13.1 billion in the comparable year-earlier quarter. With an increase in international shipments, analysts expect full-year 2013 revenue will rise 3% to $55.7 billion from $54.1 billion last year.

The earnings outlook is similar. Analysts estimate third-quarter earnings will expand 8.5% to $1.15 per share from $1.06 in the prior-year quarter. As global shipments increase, led by growing international operations, especially in Costa Rica and China, full-year 2013 earnings are projected to increase nearly 5% to $4.75 per share from $4.53 last year.

In addition to a solid growth outlook, the company rewards shareholders with a forward annual dividend yield of 2.7%. Since 2000, management has consistently increased the annual payout and will likely continue to do so.

Risks to consider: Tapping emerging markets like Costa Rica and China is key to UPS' growth. Slowdowns in these economies could negatively impact customer shipment needs, hurting revenue. However, as the middle class in these countries grows, more people will likely shop online and order goods that require UPS delivery. Therefore, UPS should maintain its strong position in the international package market.

Recommended Trade Setup:

-- Buy UPS on a breakout above $92.15, just above current resistance
-- Set stop-loss at $87.49, below current trendline and lateral support
-- Set initial price target at $114.95 for a potential 25% gain by mid-2014

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