Investors have remained reluctant to overly commit to soft drink and energy stocks, waiting to see how disruption from cannabis-infused drinks and a shift to more healthy options shake up this "stable" industry. Market watchers will get a better read when Dow component The Coca-Cola Company (KO) reports its second quarter (Q2) results ahead of the opening bell today. Analysts expect the 133-year-old company to post earnings per share (EPS) of 62 cents on revenue of $9.57 billion, per Barron's.
When Coke's main rival PepsiCo, Inc. (PEP) reported earnings earlier in July, it told investors to prepare for a difficult second half this year amid slowing sales and increased spending. Higher production costs – mainly due to the imposition of a 10% tariff on imported aluminum used for making cans – remain an ongoing challenge for the industry. Similar warnings from Coke could lead to more fizz bubbling out of beverage stocks in the short term.
From a technical standpoint, the charts of Coke, Pepsi, and Monster Beverage Corporation (MNST) appear to be forming topping patterns that indicate possible weakness. Let's review each company in further detail and explore several short sale trading setups.
The Coca-Cola Company (KO)
With a market capitalization of $218.51 billion, Coca-Cola is the largest nonalcoholic beverage company in the world. The company's namesake soft drink Coca-Cola accounts for 45% of global unit case volumes. Other brands in the industry behemoth's product portfolio include Diet Coke, Fanta, Sprite, Minute Maid, Powerade, and Dasani – the company's answer to bottled water. Trading at $51.22 and offering a dividend yield of 3.11%, the stock has returned 9.86% year to date (YTD), underperforming the beverages/soft drinks industry average and the S&P 500 by 4.60% and 9.21%, respectively, as of July 23, 2019.
Coke shares gapped down over 6% on Feb. 14 after the company issued a disappointing forecast of 4% growth in 2019 due to slower global economic growth, a strong dollar, and political uncertainty. After finding support at the $44 level, the stock reversed course and now trades just 2.4% below its 52-week high set on July 16. However, as the price has made higher highs over the past two months, the relative strength index (RSI) has made shallower highs to create bearish divergence. Traders may decide to wait for a close below a five-month trendline and an area of June consolidation at $50.50 before committing capital. Anticipate a move down to the support zone between $48 and $47. Set a stop-loss order about a point above the entry price to limit downside risk.
PepsiCo, Inc. (PEP)
Founded in 1898, PepsiCo operates as a global food and beverage company that manufactures and distributes nonalcoholic soft drinks, grain-based foods, and a variety of snacks. Its well-known brands include Pepsi, Gatorade, Mountain Dew, Quaker, Lay's, Doritos, and Cheetos. Despite the New York-based company surpassing analysts' Q2 bottom-line estimates, EPS declined 7.2% year over year (YoY). The Street has a 12-month price target on the soda giant at $133.85, just 2.7% above Monday's $130.28 close. As of July 23, 2019, PepsiCo stock has a market cap of $182.15 billion, issues a dividend yield of nearly 3%, and sports a 19.63% YTD return.
PepsiCo shares trended sharply higher between late December and June but have tracked mostly sideways for the past two months. Interestingly, both the June and July high reached $135.24, indicating a possible double top. A recent breakdown below the pattern's neckline and a six-month trendline also support the sell case. Bearish divergence between the RSI and price adds yet further signs of fading buyer momentum. Traders who execute a short sale should set a take-profit order near $117.50, where the price finds a confluence of support from a horizontal line and the 200-day simple moving average (SMA). Consider placing a stop above the breakdown candlestick's high at $133.19.
Monster Beverage Corporation (MNST)
Monster manufactures and markets energy drink beverages and concentrates in the United States as well as globally. Not surprisingly, 90% of the firm's sales come from its Monster Energy Drinks segment. Some of the Corona, California-based company's popular brands include Monster Energy, Muscle Monster, and Espresso Monster. Analysts expect the energy drink maker to post Q2 earnings of 56 cents per share when it reports its financial results on Aug. 14. Monster trades at 34 times earnings, well above the industry average multiple of 23. The company has a market value of $34.53 billion and is up nearly 30% on the year as of July 23, 2019.
Monster's share price tested significant overhead resistance at $66 earlier this month but failed to make a new high, indicating that the stock may see more selling before it adds meaningful gains. The price broke below a short-term trendline on Monday that may act as a catalyst for further downside in subsequent trading sessions. Furthermore, a bearish divergence has formed between the RSI peaks and three most recent swing highs, suggesting waning buyer interest. Those who short the stock should think about buying to cover at the $58 level – an area where the price finds crucial support from an uptrend line extending back to late December and the 200-day SMA.