Does Coca-Cola Support a Rising Stock?

With shares of Coca-Cola (NYSE:KO) trading around $38, 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.

The highly controversial new anti-gay law in Russia is leading to unwanted complications for overseas sponsors of the Sochi Olympic Games set for next year, which include Coca-Cola and McDonald’s (NYSE:MCD). The prospect of protests at Sochi against the repressive laws (and presumably the sponsors) is leaving them with an uneasy feeling regarding potential damage to their public images. The law disallows the distribution of information to minors that “promotes” same-sex relationships. Major sponsors like Coca-Cola and McDonald’s are worried about the risk of high-profile protests at the Games, and that demonstrations like that could draw attention to them for the wrong reasons and ignite calls for a boycott of their products, such as the one of Florida orange juice back in the 1970s.

T = Technicals on the Stock Chart Are Mixed

Coca-Cola stock has moved higher in the last several years. The stock has struggled to make significant progress this year and is now trading near yearly opening 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 below its key averages, which signal neutral 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

18.26%

93%

90%

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

October Options

Steep

Average

November 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 Mixed 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 Q2

2013 Q1

2012 Q4

2012 Q3

Earnings Growth (Y-O-Y)

-3.28%

-13.33%

13.92%

4.17%

Revenue Growth (Y-O-Y)

-2.57%

-0.92%

3.76%

0.75%

Earnings Reaction

-1.90%

5.68%

-2.71%

-0.60%

Coca-Cola has seen mixed earnings and revenue figures over the last four quarters. From these numbers, the markets have not been pleased with Coca-Cola’s recent earnings announcements.

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

6.21%

17.62%

1.83%

3.18%

5.93%

Coca-Cola has been a relative performance leader, 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, a sponsor of Sochi Olympic Games next year, may be seeing unwanted complications due to an anti-gay law in Russia. The stock has moved higher in the last several years but has been struggling to make significant progress this year. Over the last four quarters, earnings and revenues have been mixed which has not really pleased investors. Relative to its peers and sector, Coca-Cola has been a year-to-date performance leader. WAIT AND SEE if Coca-Cola and its sector can improve this quarter.

Using a solid investing framework such as this can help improve your stock-picking skills. Don’t waste another minute — click here and get our CHEAT SHEET stock picks now.