Is Coca-Cola a Safe Investment?

With shares of Coca-Cola (NYSE:KO) trading around $41, 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 on Tuesday reported second-quarter and year-to-date 2014 operating results. Muhtar Kent, chairman and CEO of Coca-Cola Co., said: “At the beginning of this year, we shared our strategic plan to restore the momentum of our global business. As we now reach the midpoint of the year, we have delivered sound financial performance year to date and demonstrated sequential improvement in our global volume growth. While I am pleased with our progress to date, we remain focused on the work required to return our business to the level of sustainable growth we and our shareowners expect.”

T = Technicals on the Stock Chart Are Strong

Coca-Cola stock has seen its fair share of volatility over the last couple of years. The stock is currently pulling back and may need time to stabilize before heading higher. 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 between its rising key averages, which signals neutral price action in the near-term.

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

12.4%

6%

4%

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

Put IV Skew

Call IV Skew

August Options

Average

Average

September Options

Average

Average

As of Tuesday, there is an average demand from call and put buyers or sellers, all neutral over the next two months. To summarize, investors are buying a small amount of call and put option contracts and are leaning neutral 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 Q2

2014 Q1

2013 Q4

2013 Q3

Earnings Growth (Y-O-Y)

-1.69%

-7.69%

-7.32%

8%

Revenue Growth (Y-O-Y)

-1.37%

-4.16%

-3.62%

-2.51%

Earnings Reaction

-3.04%*

3.74%

-0.98%

-0.65%

*As of this writing.

Coca-Cola has seen decreasing earnings and revenue figures over the last four quarters. From these numbers, the markets have been pleased with Coca-Cola’s recent earnings announcements.

P = Average Relative Performance Versus Peers and Sector

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

Coca-Cola

Pepsi

Dr Pepper Snapple

Monster Beverage

Sector

Year-to-Date Return

2.64%

8.4%

20.8%

-4.46%

3.19%

Coca-Cola has been an average 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. The company on Tuesday reported earnings that left investors pleased. The stock has seen its fair share of volatility over the last couple of years and is currently pulling back. Over the last four quarters, earnings and revenues have been decreasing. Relative to its peers and sector, Coca-Cola has been an average 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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