Go Long The Coca-Cola Co Stock As It Fizzles Out on Earnings

Advertisement

The old question of The Coca-Cola Co (NYSE:KO) or PepsiCo, Inc. (NYSE:PEP) has been around for decades. From an investment perspective, I’ve always been a KO stock guy. It just has better price action, especially this year.

Go Long The Coca-Cola Co Stock As It Fizzles Out on Earnings

Fundamentally, PEP is the better deal. Coca-Cola has a price-to-earnings ratio of 40X, which is double that of PEP.

But I believe the premium is warranted, since KO stock has outpaced almost 2-to-1. Year-to-date, KO is up more than 11% versus PEP’s 5% climb.

Don’t Worry Too Much About KO Stock

Coming into today, Coca-Cola stock was looking droopy. It tends to trade in waves and if this one is to play out, I would have expected a retest of $45-per-share. Even then, this would not have changed the bullish thesis since it would still be trading inside an ascending channel.

So, this slightly negative reaction to Coca-Cola earnings this morning doesn’t change my opinion of the stock. If the current macro economic conditions persist, KO stock should remain stable. For me to profit from today’s setup that is all I need to profit.

Expectations from the experts on Wall Street are already muted. So the risk of downside revisions is minimal. KO is trading in the middle of the price target range. Most analyst ratings don’t expect much, so there is little chance of let downs.

A small dip in KO stock is not a scary falling knife situation; it’s more like a butter knife. Even then, I want to leave room for error.

Technically, I am prepared to see dips, but I am also ready to own the shares at $43, should the price fall to it. I am comfortable that in that case I would be able to manage out of them with little damage.


Click to Enlarge

The sugar consumption pattern is changing in the U.S., but Coca-Cola has enough resources to adjust to it.

Furthermore, this movement away from sugar is not as prevalent globally as it is here in the U.S. So it’s not like demand for sugary drinks will imminently disappear.

Besides, the company has its hand in other beverages like coffee and tea. Those are two highly addictive drinks, so the foothold of the company into our drinking habits remains strong and lasting.

Bottom Line on Coca-Cola Stock

The Trade: Sell the KO Feb 2018 $43 put and collect 50-cents-per-contract to open. This is a bullish trade with 85% odds of success. But if the price falls below $42.50, I would accrue losses.

Selling naked puts carries big risk. For those who want to mitigate it, they can sell a spread instead.

The Alternate Trade: Sell the Feb 2018 KO $43/$41 credit put spread, which would yield 10% on risk. Both trades have about the same odds of winning.

It is important to note that I don’t need a rally in either set ups. As long as KO stock stays above my sold leg, I can retain my maximum gains.

Ultimately, regardless of how careful I am, investing in stocks is fraught with danger, so I never risk more than I am willing to lose

Get my newsletter for free here. Nicolas Chahine is the managing director of SellSpreads.com. As of this writing, he did not hold a position in any of the aforementioned securities. You can follow him as @racernic on twitter and stocktwits.

Nicolas Chahine is the managing director of SellSpreads.com.


Article printed from InvestorPlace Media, https://investorplace.com/2017/10/the-coca-cola-co-ko-stock-fizzles/.

©2024 InvestorPlace Media, LLC