Beyond the bubbles
11/23/18

●Coca Cola (KO) hits record highs as broad market slumps

●Company expanding into coffee, sports drinks

●Stock broke out of range in late October


 

With the market basically getting walloped on Monday, there weren’t too many large-cap stocks trading at 52-week highs. Staid, stolid Coco Cola (KO) was one of them, as shown in the following LiveAction scan:

LiveAction scan: 52-week new highs, 11/19/18. Triangle blurb: KO doing more than OK.

Source: OptionsHouse


The day marked a record high and close for KO—the apex of a 13% rally since October 12, the bulk of which occurred after the stock busted out of a three-month trading range on October 30 after its latest earnings release.

On Tuesday, though, some of the fizz escaped from the bottle, as KO sold off more than 2.5% after inching to a new intraday record high of $50.84:

Coca Cola (KO), 8/2/18–11/21/18. Coca Cola (KO) daily price chart. Range breakout.

Source: OptionsHouse


True, it was a nasty day for the market as a whole, but KO’s proportionally larger down move may have made some traders wonder whether the stock had gotten ahead of itself. The stock traded weakly on Wednesday, too, while the S&P 500 (SPX) rebounded.

Other traders may have been thinking the stock was perhaps too highly carbonated before Tuesday, considering the extent of the move. A longer-term chart highlights how exceptional the recent rally was, combining high momentum (the biggest five-week rally in several years) and altitude (a push to new highs, rather than a rebound off lows):

Coca Cola (KO), 7/2/14–11/21/18. Coca Cola (KO) weekly price chart. High-momentum rally to new highs.

Source: OptionsHouse


In one sense, Coke’s recent pop wasn’t totally out of left field. The consumer staples sector has been the second-strongest corner of the S&P 500 (SPX) over the past six months, and the third-strongest over the past month. Other “defensive” consumer staples names, like Procter & Gamble (PG), Johnson & Johnson (JNJ), and PepsiCo (PEP), have also enjoyed nice rallies over the past several weeks as the broad market has struggled.1

For its part, Coke has made moves to address a marketplace that increasingly frowns on sugary drinks. Besides putting more weight behind Diet Coke, in August the company bought London-based, 4,000-outlet coffee chain Costa Coffee, although KO stresses its goal isn’t to compete with Starbuck’s, but rather to go after a piece of the ready-to-drink (vending machines, etc.) and home coffee markets.2 It also took a big stake in BodyArmor to increase its footprint in the sports drink space (Gatorade is owned by Pepsi, don’t you know).3

Long-term prospects aside, many short-term traders may be looking for KO to continue to cool its jets a bit. Traders often look for a stock to test a breakout point or previous technical level after a high-momentum move— in this case, for example, a move back to the high of the August-October trading range around $47, or at least below the previous record high from January around $48.60 (the stock came close to that level yesterday morning).

At that point, bulls may find KO more effervescent.

Market Mover Update: Although last week Nvidia (NVDA) blew a hole in its historical tendency to rally after earnings, it did follow through on its pattern of continuing to decline after an initial earnings selloff. After tumbling 19% on Friday after Thursday’s post-market earnings release, the stock dropped another 7% on Monday, and turned negative Wednesday after an early morning rally.

Today’s numbers (all times ET): Germany GDP; US stock market closes at 1 p.m.

 

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1 Barron’s. Coca-Cola and Other Stodgy Stocks Are Back in Fashion as the Rest of the Market Tanks. 11/20/18.

2 Zacks. Coca-Cola (KO) Chalks Out Plan for Coffee Business, Cannabis. 11/19/18.

3 CNN.com. Coca Cola is fighting Gatorade by investing in BodyArmor. 8/14/18.