Should You Take a Chance With Coca-Cola?

With shares of Coca-Cola (NYSE:KO) trading around $40, is KO an OUTPERFORM, WAIT AND SEE, or STAY AWAY? Let’s analyze the stock with the relevant sections of our CHEAT SHEET investing framework:

T = Trends for a Stock’s Movement

Coca-Cola is a beverage company that engages in the manufacture, marketing, and sale of nonalcoholic beverages worldwide. Its sparkling beverages include carbonated energy drinks, carbonated waters, and flavored waters. The company’s still beverages comprise non-alcoholic beverages like non-carbonated waters, flavored and enhanced waters, non-carbonated energy drinks, juices and juice drinks, ready-to-drink teas and coffees, and sports drinks. Coca-Cola Co. sells its products under the Coca-Cola, Diet Coke, Coca-Cola Light, Coca-Cola Zero, Sprite, Fanta, Minute Maid, Powerade, Aquarius, Dasani, Glacéau Vitaminwater, Georgia, Simply, Del Valle, Ayataka, and I Lohas brand names.

Coca-Cola has been a phenomenal long-term investment. It produces products that virtually everybody in the world recognizes. Its brand is so ubiquitous and so enmeshed in our culture that there are places in the country where people use the word “Coke” for “soda.” As a result, the stock has been one of Warren Buffett’s favorites for a long time. He is known for saying that he believes that in 20 years, there is a strong likelihood that the company will be selling substantially more Coke than it does now.

T = Technicals on the Stock Chart Are Strong

Coca-Cola stock has made positive progress over the past several years. The stock is currently trading near all time highs and looks set to continue. Analyzing the price trend and its strength can be done using key simple moving averages. What are the key moving averages? The 50-day (pink), 100-day (blue), and 200-day (yellow) simple moving averages. As seen in the daily price chart below, Coca-Cola is trading above its rising key averages which signal neutral to bullish price action in the near-term.

KO

(Source: Thinkorswim)

Taking a look at the implied volatility (red) and implied volatility skew levels of Coca-Cola options may help determine if investors are bullish, neutral, or bearish.

Implied Volatility (IV)

30-Day IV Percentile

90-Day IV Percentile

Coca-Cola options

13.74%

63%

60%

What does this mean? This means that investors or traders are buying a significant amount of call and put options contracts, as compared to the last 30 and 90 trading days.

Put IV Skew

Call IV Skew

July Options

Flat

Average

August Options

Flat

Average

As of today, there is an average demand from call buyers or sellers and low demand by put buyers or high demand by put sellers, all neutral to bullish over the next two months. To summarize, investors are buying a significant amount of call and put option contracts and are leaning neutral to bullish over the next two months.

On the next page, let’s take a look at the earnings and revenue growth rates and the conclusion.

E = Earnings Are Decreasing Quarter-Over-Quarter

Rising stock prices are often strongly correlated with rising earnings and revenue growth rates. Also, the last four quarterly earnings announcement reactions help gauge investor sentiment on Coca-Cola’s stock. What do the last four quarterly earnings and revenue growth (Y-O-Y) figures for Coca-Cola look like and more importantly, how did the markets like these numbers?

2014 Q1

2013 Q4

2013 Q3

2013 Q2

Earnings Growth (Y-O-Y)

-7.69%

-7.32%

8%

-3.28%

Revenue Growth (Y-O-Y)

-4.16%

-3.62%

-2.51%

-2.57%

Earnings Reaction

3.74%

-0.98%

-0.65%

-1.9%

Coca-Cola has seen decreasing earnings and revenue figures over the last four quarters. From these numbers, the markets have had mixed feelings about Coca-Cola’s recent earnings announcements.

P = Weak Relative Performance Versus Peers and Sector

How has Coca-Cola stock done relative to its peers, Pepsi (NYSE:PEP), Dr Pepper Snapple (NYSE:DPS), Monster Beverage (NASDAQ:MNST), and sector?

Coca-Cola

Pepsi

Dr Pepper Snapple

Monster Beverage

Sector

Year-to-Date Return

-0.77%

6.08%

17.22%

-0.03%

6.62%

Coca-Cola has been a poor relative performer, year-to-date.

Conclusion

Coca-Cola is an iconic company that provides beverage products through its recognized brands to consumers and companies in just about every country worldwide. Warren Buffett is known for saying that he believes that in 20 years, there is a strong likelihood that the company will be selling substantially more Coke than it does now. The stock has moved higher over the past several years and is currently trading near all time highs. Over the last four quarters, earnings and revenues have been decreasing, which has produced mixed feelings among investors. Relative to its peers and sector, Coca-Cola has been a weak year-to-date performer. WAIT AND SEE what Coca-Cola does this quarter.

Let’s analyze the stock with the relevant sections of our CHEAT SHEET investing framework:

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