Coca-Cola (KO) Could Post Strong 2021 Returns

Dow component The Coca-Cola Company (KO) is wrapping up a mediocre year, trading within two points of the last price posted in December 2019. The pandemic hit the beverage icon hard, cutting into revenue built on partnerships with fast food chains, movie theaters, and sports teams. Even the venerable Coke machine took a hit in 2020, with thirsty folks avoiding the buttons, change, and cold cans due to worries about infection.

Key Takeaways

  • Coca-Cola stock has rallied within six points of February's all-time high.
  • It probably won't break out to a new high until the second half of 2021, at the earliest.
  • 2021 price action should reinstate the stock's well-earned reputation as a slow mover.

The stock is no stranger to mediocrity, posting meager returns for shareholders between 2013 and 2018. However, it sprung to life in 2019, booking a 17% return in addition to a healthy 3% dividend yield. That momentum signaled the end of a multi-year test at the 1998 high, which marked resistance for more than 20 years. The sky should have been the limit after mounting that barrier, but the pandemic had other plans.

Fortunately for investors, Coca-Cola is on the recovery trail, benefiting from buying interest in the pandemic's biggest victims. Even so, it is underperforming rival PepsiCo, Inc. (PEP), which has squeezed out an 8% year-to-date return. The uptick has now reached within six points of February's all-time high, raising hopes that it will resume the long-term uptrend. However, closing that last stretch could take time, given Coca-Cola's well-earned reputation as a slow-mover.

Wall Street consensus on Coca-Cola stock has improved since the first quarter, with a "Strong Buy" rating based upon eight "Buy" and two "Hold" recommendations. No analysts are recommending that shareholders close positions and move to the sidelines. Price targets currently range from a low of $53 to a Street-high $62, while the stock is set to open Wednesday's session about $3 below the median $57 target. Those narrow boundaries make sense, given the enormous 3.87 billion share float.

The dividend yield, expressed as a percentage, is a financial ratio (dividend/price) that shows how much a company pays out in dividends each year relative to its stock price.

Coca-Cola Long-Term Chart (2000 – 2020)

Chart showing the share price performance of The Coca-Cola Company (KO)

A historic uptrend ended at $44.47 in 1998, giving way to a brutal but shallow downtrend that finally ended at $18.72 more than a decade later. Bullish price action into 2014 completed a round trip into the prior century's peak, yielding a shallow rising channel that crisscrossed long-term resistance repeatedly into the third quarter of 2018, when committed buyers entered in force and triggered a sustained advance.

The rally stalled in February 2020 and rolled over, slicing through the 1998 high once again in March. It remounted that level in April and entered a stairstep recovery pattern that accelerated at the start of November, when Pfizer Inc. (PFE) unveiled positive results for its vaccine. The uptick stalled immediately at the .786 Fibonacci retracement level of the pandemic decline, giving way to rounded sideways action into year end.

That ratio marks the last harmonic barrier prior to a 100% retracement into February's all-time high. As we've seen with this year's strongest performers, it is easy to stall at the pre-pandemic highs for weeks or months, limiting upside potential. As a result, a breakout and new uptrend might have to wait until the second half of 2021, at the earliest. Even so, it isn't too early for long-term investors to dip their toes into water.

A trading channel is drawn using parallel trendlines to connect a security's support and resistance levels within which it currently trades. A trading channel may also be known as a price channel.

The Bottom Line

Coca-Cola stock is working its way back to February's all-time high, but it will take time to recover the momentum lost after 2019's strong price action.

Disclosure: The author held no positions in the aforementioned securities at the time of publication.

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