Collect on Coca-Cola’s New Highs

As earnings season continues, stocks like KO continute to outperform

Coca-Cola Company (NYSE:KO) is a top dividend payer and a member of the consumer staples sector. Selling a put write on KO might be bullish, but the stock is defensive enough that this trade could remain profitable if the market gets choppy again.

The most positive thing about this earnings season is that the majority of stocks are still reporting above expectations. Although a high surprise ratio isn’t unusual on its own, some analysts were concerned the ratio of surprises would decline this quarter, which would justify a more cautious outlook.

A little more than half of the companies in the S&P 500 have reported earnings, and average net income has finally crossed into growth territory. We weren’t sure that would happen.

However, traders should be clear-eyed about the market right now. Don’t expect completely smooth sailing with valuations as high as they are. Average net income might fall back into negative territory by the end of February.

A bullish position on KO will benefit if stocks continue to rise, and KO will weather the storm if other stocks fall.

Dividend Yields are Key

At the beginning of the year, sectors containing stocks that offer high dividend yields were outpacing the broader market. You can actually read about this phenomenon in an article we wrote for InvestorPlace. Consumer staples were the only sector we discussed that hadn’t beat the S&P 500.

Now that’s changed.

If you look at the chart below, you can see that the consumer staples sector, as represented by the Consumer Staples Select Sector SPDR Fund (NYSEARCA:XLP), has outpaced the S&P 500’s gains since early January.

Daily Chart Comparing the S&P 500, XLP and KO — Chart Source: TradingView

You’ll also noticed that KO has outpaced XLP, gaining over 8% since early January. We aren’t the only people to notice this performance gap — Zacks also has an article about it.

The push into high dividend-yielding stocks is driven by a decrease in long-term Treasury yields. CBOE 10-Year Treasury Yield Index (TNX) was low when we first observed this, sitting at around 1.75. Now it has dropped to 1.58.

This trend in the market doesn’t seem to be going away, and a short-term bullish play on KO is a great way to take advantage.

KO’s 2020 Outlook

In its earnings report two weeks ago, KO beat both revenue and earnings per share expectations, increasing revenue by 16% year-over-year and earnings by 1% year-over-year. In its guidance, the company said it expected 5% revenue growth in 2020. It increased earnings expectations by 7% from 2019.

KO may not be a “growth stock,” but those numbers were strong enough to push the stock above resistance at around $58, as you can see below.

Daily Chart of The Coca-Cola Company (KO) — Chart Source: TradingView

The fundamental trends on KO are solid, and we don’t see any potential weaknesses that could trip things up in the short term.

From a technical perspective, we think $58 would be a good strike price for a put write because it is around KO’s pre-earnings resistance. Historically, these levels tend to act as strong layers of support where new buyers are likely to jump in if the stock retraces.

InvestorPlace advisers John Jagerson and S. Wade Hansen, both Chartered Market Technician (CMT) designees, are co-founders of LearningMarkets.com, as well as the co-editors of Strategic Trader.


Article printed from InvestorPlace Media, https://investorplace.com/2020/02/collect-on-coca-colas-new-highs/.

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