Should Coca-Cola Be In Your Portfolio?

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 nonalcoholic beverages including noncarbonated waters, flavored and enhanced waters, noncarbonated energy drinks, juices and juice drinks, ready-to-drink teas and coffees, and sports drinks. Coca-Cola Company sells its products primarily 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. Consumers around the world love the products offered by Coca-Cola and enjoy them almost on a daily basis. Through its brands, Coca-Cola is able to reach a wide consumer base in just about every corner of the world that will continue to enjoy its products for years to come.

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T = Technicals on the Stock Chart are Mixed

Coca-Cola stock has been on a powerful move higher since establishing lows soon after the 2008 Financial Crisis. The stock is currently digesting gains slightly below all-time high prices. 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 around 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

21.8%

93%

92%

What does this mean? This means that investors or traders are buying a very 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

Steep

Average

August Options

Steep

Average

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

2013 Q1

2012 Q4

2012 Q3

2012 Q2

Earnings Growth (Y-O-Y)

-12.36%

13.92%

4.17%

0.83%

Revenue Growth (Y-O-Y)

-0.92%

3.76%

0.75%

2.73%

Earnings Reaction

5.68%

-2.71%

-0.6%

1.56%

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

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P = Excellent 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

12.55%

18.79%

5.66%

11.98%

12.13%

Coca-Cola has been a relative performance leader, year-to-date.

Conclusion

Coca-Cola provides highly desired beverage products to consumers in just about every country around the world. The stock has been on a powerful run and is now digesting gains slightly below all-time high prices. Over the last four quarters, earnings and revenue figures have been on the rise which have maintained investors in the company pleased. Relative to its peers and sector, Coca-Cola has been a year-to-date performance leader. Look for Coca-Cola to OUTPERFORM.

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