Today, we’re recommending a new bullish trade on Coca-Cola (KO). KO is climbing and is threatening to break out of the consolidation range it has been in for a little more than a month. We think $41 is the key resistance level to watch in this consolidation range now that the 30-day moving average has caught up with the price surge the stock saw in mid-April after the company reported better-than-expected earnings.
KO looks strong for a few reasons. First, the company has continued to see strong international growth — as evidenced by its last earnings announcement. This is key in an era where traders are wondering how strong the U.S. economy is going to be in the short term.
Second, the company is continuing to branch out into new business lines. In February, Coca-Cola announced a 10-year partnership with Keurig Green Mountain (GMCR) in which pod-based Coke products will be sold worldwide for use in the soon-to-be released Keurig Cold beverage system; KO also recently increased its stake in GMCR from 10% to 16%. Coca-Cola is also expanding its line of Freestyle beverage machines, bringing the same self-serve technology that has become increasingly popular in restaurants to a new countertop model for at-home use.
Third, the company is a steady dividend payer, which should prove beneficial as investors continue their shift from riskier, momentum-based trades to more stable, dividend-based trades. Lastly, KO has long distinguished itself as a defensive stock. Even when people stop spending money on new cars and new TVs, they continue to buy Coke.
We do need to be aware that the stock goes ex-dividend on June 12, which oftentimes causes the stock price to drop in relation to the dividend being paid — $0.305, in this case. This should only be a small speed bump in the course of this trade, though.
KO doesn’t report earnings again until mid-July, and we anticipate that the stock will have made a significant move higher before that date rolls around. Our recommendation is to buy to open the KO Aug. 42 Calls for a maximum price of $0.45.
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