(Note: The author of this fundamental analysis is a financial writer and portfolio manager.)
Shares of The Coca-Cola Co. (KO) have had a difficult start to 2018, with shares of the stock down by about 3%, and over 8% off their highs. But options traders are betting that trend is about to reverse, and shares are due to do rise by nearly 8% by the start of early next year, from its current price of about $44.50.
The bullish outlook for the stock comes despite shares trading at a lofty valuation when compared to the broader-based S&P 500. But the company is expecting to have solid earnings growth in 2018, despite declining revenues.
Traders are betting shares of the stock rise using options set to expire on Jan. 18, 2019, with the number of calls recently climbing by roughly 11,300 contracts at the $47 strike price, and now have an open interest of roughly 21,600 contracts. With contracts trading at a cost of approximately $0.75 each, shares of Coke would need to rise to roughly $47.75 for a buyer of the calls to break even if held to expiration.
The long straddle options strategy is pricing in shares of Coke to rise or fall by roughly 9% by expiration in January, from the $45 strike price. It places shares in a trading range of approximately $41 and $49. The number of calls also heavily outweighs the puts as well, by nearly 2 to 1 with roughly 21,000 open call contracts to approximately 12,000 open put contracts, another indication traders are betting on shares of Coke to rise.
Solid Earnings Growth
Perhaps some of the optimism stems from the fact the company is expected to see earnings growth of about 9.5% in 2018, followed by an increase 8% in 2019, with the company reaffirming that earnings outlook on June 13. But the revenue outlook for the company doesn't look strong at all in 2018, with sales that are seen falling by nearly 10%, followed by improving revenue growth over the next two years.
Technical analysis also suggests that shares may be heading higher, as shares near a potential breakout at $44.50, the technical resistance level. Should shares rise above technical resistance, the stock could be set to rise to about $49, taking the stock back to the top of its multiyear trading range.
But shares of the company are hardly cheap, trading at 19.6 times 2019 earnings estimates, more expensive than fellow cola maker PepsiCo Inc. (PEP), and the S&P 500, with both trading around 17 times 2019 earnings estimates.
It would seem the traders and investors are betting shares of Coca-Cola will rise, and perhaps those expectations have not been fully reflected in the fundamental story.
Michael Kramer is the founder of Mott Capital Management LLC, a registered investment adviser, and the manager of the company's actively managed, long-only Thematic Growth Portfolio. Kramer typically buys and holds stocks for a duration of three to five years. Click here for Kramer's bio and his portfolio's holdings. Information presented is for educational purposes only and does not intend to make an offer or solicitation for the sale or purchase of any specific securities, investments, or investment strategies. Investments involve risk and unless otherwise stated, are not guaranteed. Be sure to first consult with a qualified financial adviser and/or tax professional before implementing any strategy discussed herein. Upon request, the advisor will provide a list of all recommendations made during the past twelve months. Past performance is not indicative of future performance.