Earnings season may be winding down, but activity, and options trading, is still high. Next week has around 65 S&P 500 companies on the schedule, with consumer staples – Coke, Pepsi (NYSE: PEP), Kraft (NYSE: KFT), Sara Lee (NYSE: SLE), Philip Morris (NYSE: PM), among others – taking much of the spotlight. So let’s take a look at the granddaddy of soft drinks.
The Coca-Cola Company (NYSE: KO) reports Q4 earnings before the open on Wednesday, February 9. Analysts expect a modest 9% increase from a year ago. The important thing, though, is that KO never misses an estimate (never being defined as nearly seven years). And the stock generally does well after reporting, having gained ground in the week following the past three of four reports.
The stock usually runs up into earnings, which can lead to a sell-the-news type of post-earnings decline. That has generally not been the case with KO. Plus, this quarter is not one of those situations. After running up more than 30% in the last six months of 2010, the shares have had a rough 2011. In fact, the stock dropped more than 4% in January.
But the shares have found support in the $62 – $62.50 region, using the combined foundation of the 100-day moving average and heavy put open interest at the February 62.50 strike. This sets the stock up well for another strong post-earnings showing.
Coke Stock
The other factor we like about KO is recent option activity. The put/call ratio is coming off a multi-year high, a sign of unwinding pessimism. The stock tends to move opposite of this ratio, so we view this growing preference for calls over puts as a bullish sign.
KO appears to have found a solid foundation after a 6% pullback, which bodes well heading into next week’s earnings report. Look at the in-the-money KO March 62.50 Call in the range of $1.50. A return to the January 3 high should return more than 100% on this option.
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