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Michael Fowlkes' Analyst Insights

Options and ETF Analyst Writer
Michael Fowlkes
Author Bio


2/10/2018 12:54 PM

What's Happening

Soft drink giant Coca-Cola (KO) will report its fourth-quarter numbers February 16. The consensus calls for earnings of $0.38 per share, up a penny from the same period last year. The stock sold off in the recent market correction, and shares are currently down 5.6% on the year.

Technical Analysis

KO was recently trading at $43.00, down $5.62 from its 12-month high and $2.78 above its 12-month low. Overall technical indicators for KO are bearish and the stock is in a strong downward trend. The stock has recent support above $43.00, and recent resistance below $46.50. Of the 15 analysts who cover the stock, six rate it a “strong buy”, and nine rate it a “hold”. KO gets a score of 41 from InvestorsObserver’s Stock Score Report.

Analyst's Thoughts

Leading up to the recent market correction, Wall Street remained very bullish on KO. In recent years consumers have shifted away from sugary soft drinks in favor of healthier juice and water options, but KO has done a good job boosting its juice and snack businesses, which have helped it keep earnings fairly steady despite falling soda sales. Earnings have fallen by just 1.2% per annum over the last five years, but analysts see average annual earnings growth of 4.8% for the next five years. As the market moved higher over the last year, KO’s valuation got a bit high, and even with the recent pull back, shares remain priced for perfection with a P/E of 41.5. If KO is able to hit its estimates, the stock should move to the upside, but shares will remain highly sensitive to the direction of the overall market in the weeks and months ahead. Most analysts agree that the market’s sell off will prove to be a good thing for the 9-year bull market, and that the underlying fundamentals remain in place to justify the market moving higher through the remainder of the year, and if that is the case, KO should regain its momentum and start to make back some or most of its recent losses. The company has posted solid quarterly beats the last two quarters, and if it is able to do so once again with its Q4 numbers, the stock will move higher. However, with such a high P/E, shareholders should have an exit strategy in place just in case the results disappoint and the stock moves lower.

Stock Only Trade

If you're looking to establish a long stock position in KO, consider buying the stock under $43.00. Sell if it falls below $38.75 or take profits if it gets to $49.50.

Bullish Trade

If you want a bullish hedged trade on the stock, consider an April 33/38 bull-put credit spread for a 35-cent credit. That's a potential 7.5% return (39.2% annualized*) and the stock would have to fall 10.8% to cause a problem.

Bearish Trade

If you want to take a bearish stance on the stock at this time, consider an April 46/50 bear-call credit spread for a $0.50 credit. That's a potential 14.3% return (74.5% annualized*) and the stock would have to rise 8.1% to cause a problem.

Covered Call Trade

If you like the stock, but wish to lower your cost basis on a new position, you may want to consider a May $43.00 covered call. Buy KO shares (typically 100 shares, scale as appropriate), while selling the May $43.00 call for a debit of $41.20 per share. The trade has a target assigned return of 4.4%, and a target annualized return of 16.4% (for comparison purposes only). 



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