Coca-Cola. It’s practically the C in AMERICA. One of our most successful global exports of the last century. And even though that global growth has been phenomenal, more than half of their beverage sales still come from North America.
KO caught my interest when
I first looked at the consumer staples space 2 months ago. Consumer staples names seemed far too richly priced given their growth prospects. Clearly, they’re a safe haven sector with good yield. But against the alternatives (primarily health care or telecom), they look frothy.
KO is a company that has consistently grown earnings between 5 and 15% for the last 10 years. Very consistent track record. Earnings growth of 0-15% through thick or thin. But KO is almost twice the size in market cap terms than it was 10 years ago. And with much slimmer growth prospects. In fact, KO averaged 12% earnings growth in 2010 and 2011, but only 5% is expected this year. However, as with most staples names, P/E is near 3 year highs:
Technically, KO broke out above the $36 resistance level last year. But in the past 6 months, it has formed a classic head and shoulders pattern, not able to make a higher high in September when the market broke out. A break below 36 could portend prices in the low 30’s in quick fashion:
One bullish argument remains: the dividend yield is higher now than it was 5 or 10 years ago. This is true, but KO is also a much larger company, in a much more uncertain global environment, with fewer opportunities for growth. So I think the yield is a reflection of a lack of opportunities as well.
If you’re looking for yield, I think you find a 10 P/E name that has little risk of significant earnings contraction. Not a value trap like INTC, but value like PFE or ABT. KO is just too expensive to rely simply on the dividend yield argument.
Finally, what does the options market say in KO? Implied volatility is in the teens across the term structure, even after the recent 10% selloff. I am going to do a trade that’s rare on the site, but what I view is a great risk/reward way to get bearish KO here.
NEW TRADE: KO ($36.95) Bought the Jan14 35 put for $2.70 outright
-Bought 1 Jan14 35 put for $2.70
Break-Even on Jan14 Expiration:
-Profits below 32.30 on the stock. Losses of up to 2.70 between 32.30 and 35.00, and max loss of 2.70 above 35.00
TRADE RATIONALE: This is a situation where some might prefer to use 1 or 2 month options to get short KO, but I am less comfortable doing that given that the stock is already down almost 10% in the last 2 months. I do think it’s going lower, but buying Jan14 puts gives me a great way to participate on the downside with both price and vol (implied vol likely moves higher on a move lower from here). It’s also quite low risk trade, as Jan14 implied vol is unlikely to move much lower from here. The breakeven level of 32.30 looks far away, but I certainly don’t plan on holding this trade for a year. But I might be in this one for the next few months. So this is a “set it and forget it” options trade, a rare breed for sure.
