Announcement: CC and I will be co hosting a live webinar this Monday for the Ticker District with my Options Action co-panelist Mike Khouw. We’ll be talking about options and event risk in particular and will be taking some of your questions (submitted beforehand to contact@tickerdistrict). We’d love to have you all there. Registration is easy and free: http://tickerdistrict.com/webinar-registration/
Shares of Coca-Cola (KO) closed at a new all time high yesterday, placing the stock up about 6% on the year:
The stock’s year to date out-performance of the broad market likely has something to do with the 5% decline of the U.S. Dollar Index (DXY) from its 52 week highs made in early December, and the 3.5% decline since the start of March. KO gets more than 50% of their sales outside the U.S., and the dollar’s 20% ramp that started in 2014 has been a serious headwind to growth as KO relies on much of the rest of the world for future growth.
As for the greenback, the one year chart of the DXY shows the range between $94 and $100 which it has bounced off of on the low end and been rejected from on the high end on numerous occasions over the last year. The 200 day moving average at $97 is just about the mid point. The point here is that I am not so sure that dollar is a great press on weakness (as a short) so close to the low end of a very well defined 1 year range:
I’ll keep this really simple. KO trades at 23.3x expected 2016 earnings that consensus expects to decline 3% this year, marking its third consecutive year of negative earnings growth and its 4th consecutive sales decline at negative 4%. KO is likely a low single to mid single digit grower or decliner for both earnings and sales for years to come when you consider the building headwinds to their core product offerings in the developed world.
So why on earth would anyone pay 23.3x their earnings? Well, a 3% dividend yield, multi-billion share buyback helps, but given their limited ability to stimulate top line growth, with much bottom line growth to come from financial engineering and cost cutting, there have to be far better buys on a PE/G basis.
Short dated options prices in KO are as cheap as they have been in a while, with 30 day at the money implied vol at about 13.3% (blue line, the price of options, tracking just below 30 day realized volatility at 14.1%) (white line, how much stock has been moving):
Near term the rally seems a bit overdone, and playing for a consolidation near the breakout level of $44, or even a re-tracement back to the uptrend from the August 24th lows feels like a fairly high probability outcome in the next couple months:
So what’s the Trade?
For those that are already long stock replacements at this point in the chart make a lot of sense. The May 45 calls (stock reference 45.60) are offered at 1.45. That seems like a much better own than the stock itself here, and those calls catch earnings meaning they would offer similar upside to the stock itself on a breakout (their breakeven is 46.45, so less than a dollar higher in the stock) and define overall risk to the downside to just 1.45.
We would even think about playing this from the short side but want to see how it acts up near this level first. If we decided to pull the trigger we’d likely look to the May 46/42 put spread, right now that’s offered at about a dollar, catches earnings and offers a 3-1 payout on a pullback to the near the 200 day moving average.