Iconic beverage maker Coca-Cola (NYSE:KO) has been one of the surprise hits of 2019. Since this January’s opening price, KO stock is up almost 15%. While for other investments that’s hardly something to write home about, the company’s shares have been rangebound for many years.
Moreover, that frustrating sideways trading had a fundamental basis. Primarily, millennials have not gravitated toward soft drinks like prior generations. Instead, they have opted for healthier fare, which, let’s face it: Coca-Cola products typically are anything but healthy. Therefore, Coca-Cola stock hasn’t enjoyed much upside.
However, positive sentiment has started to seep into KO stock recently. For instance, the beverage maker has repackaged its Diet Coke lineup to look taller and lither. Additionally, they’ve added some zesty new flavors, bringing more relevance to their “healthy-ish” brand.
Better yet, KO has reported very encouraging earnings reports, despite some awfully ugly geopolitical news. In their most recent report for the second quarter, the company beat on both the top and bottom line. But what really lit a fire under Coca-Cola stock was guidance. Going completely against the grain, management raised its full-year revenue outlook, with expectations of organic revenue growth of 5% instead of the previous 4%.
Certainly, stakeholders of KO stock have legitimate reasons to trust this resurgent optimism. The soft drink specialist is rolling out new products and even partnering with Netflix (NASDAQ:NFLX) for a key promotion. Plus, their Zero Sugar lineup enjoyed volume growth that measured in the double digits worldwide.
Yet with the ever-escalating ugliness in the U.S.-China trade war, will the good times with Coca-Cola stock crumble?
KO Stock One of Few Recession-Resistant Plays
At first glance, avoiding Coca-Cola stock might seem like the prudent move. For one thing, shares dipped 1.4% during Friday’s session. Furthermore, if we do have a panicked situation break out, virtually all stocks will suffer volatility.
However, the key attribute that broadly protects KO stock at this juncture is its core product category. Coca-Cola is in the business of manufacturing and distributing fast-moving non-durable consumer goods. In other words, Coca-Cola brand beverages represent the last products that consumers will give up.
Because if the world stops drinking Coca-Cola due to economic concerns, it means we have already entered the apocalypse.
Instead, what people avoid first and foremost in a recession are durable goods, or assets that feature long usable lifespans. Thus, consumers won’t make big-ticket purchases, such as homes or cars. Those types of assets usually require a significant time commitment.
But soft drinks are cheap, something that almost anyone in any reasonable financial situation can afford. Moreover, they provide a distraction effect that is an especially powerful motivator during economic downturns.
For instance, I recently wrote that streaming-equipment provider Roku (NASDAQ:ROKU) might benefit from a recession. Historically, entertainment industries have performed well because they provide escapism for down-on-their-luck workers. And Coca-Cola is a cheap pick-me-up, a characteristic that should help KO stock during bearish markets.
Most importantly, I’m not just pulling this argument out of my hind end. During the Great Recession, consumers avoided durable goods like the plague. However, non-durable consumer goods specialists like Coca-Cola weren’t as heavily impacted.
Also, management protected the company at the time through layoffs, and even raised prices to offset lowered volumes. I’d argue they’re prepared this time too, thus providing confidence toward Coca-Cola stock.
Don’t Bet Too Deeply
Although I firmly believe that Coca-Cola stock has recession-resistant characteristics, I wouldn’t go overboard with this contrarian idea.
As I mentioned above, a market panic would threaten most stocks. That’s because the fear of losing money is often a bigger motivator than missing out on an opportunity.
But more critically, KO stock benefited from the last recession due to the China narrative. Earlier this decade, many companies eyed the Asian giant because it was enjoying robust economic growth. Put differently, they saw China as the eventual pathway that would lead the world out of recession.
But in this go around, China is no longer the source of long-term optimism. Instead, it’s part of the problem. And if we do have a major recession soon, what is the next China? I just don’t see any other viable alternative market, which is what makes this juncture so worrisome.
That said, Coca-Cola’s low-cost, high-volume business and proven success with its healthy line should provide core buffers against a downturn. So, here’s how I would approach shares. Let KO stock drop to its natural bearish target, which is its 50-day moving average. From there, take a small position. You want to keep the powder keg dry for any big moves down.
As of this writing, Josh Enomoto did not hold a position in any of the aforementioned securities.
