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Investors Are Thirsty for Big Soda

15 October 2014 in Trading Ideas

While voters in the San Francisco Bay Area mull whether to levy a tax on the sales of soda and other sweetened beverages this November, shareholders of soda kings Coca-Cola and PepsiCo have spent the past 12 months watching their stocks appreciate.

Shares of both Coke and Pepsi have risen more than 19% in the past year – a period that has seen the S&P 500 rise 10.1%.

Combined, the stocks also have a 19% weighting in the Caffeine Fix motif, and the outperformance this past month by Coke and Pepsi shares has helped lift the motif to a 0.6% rise, while the S&P 500 is off 6.6% during that time.

So far this year, the motif has risen 27% and the S&P 500 has gained 3.1%.

As Bloomberg pointed out, shares of Coke recently hit a 16-year high as investors have chosen to shrug off some of the company’s recent struggles as the broader market anxiety entices many to seek relatively stable defensive stocks.1

Bloomberg noted that Coke CEO Muhtar Kent has been under fire recently for trimming expenses too slowly at a time when many consumers appear to be abandoning soft drinks because of concerns about obesity and health risks from artificial sweeteners.

However, investors are betting that the company is on the verge of a cost-cutting spree and that the company’s longtime support by mega-investor Warren Buffett, who recently gave a thumbs-up to the company’s new stock compensation plan, signals the stock could be a crucial haven from recent market volatility, according to Bloomberg.

Cost-cutting also has been a key focus for Pepsi, which has rallied after a pledge by CEO Indra Nooyi to cut $5 billion in expenses over five years beginning in 2015, extending a plan already underway. Last week, Bloomberg said, Pepsi posted a third-quarter profit that beat analysts’ estimates and boosted its earnings forecast for the year.

Now that Coke has become more focused on deeper cutting, it may also move faster on selling parts of its asset-heavy distribution system that it took in-house in 2010, Bloomberg reported. In addition, Sanford Bernstein analyst Ali Dibadj said the company could continue to raise prices methodically, while avoiding panicky price cuts intended to stoke demand.

However, another significant strategic piece for Coke is its business that is beyond selling soda to a declining American market. According to Bloomberg, Coke has been boosting revenue by adding faster-growing products like Vitaminwater and Monster energy drinks to its distribution system, while delving into emerging technologies like at-home soda makers.

Coke also has never let up in aggressively expanding overseas.

For now, investors appear to be giving both Coke and Pepsi the benefit of the doubt that the two companies can successfully navigate a changing global beverage market.

1Duane D. Stanford, “Coca-Cola Hits Record as Investors Seek Safety,” Bloomberg.com, Oct. 10, 2014, http://www.bloomberg.com/news/2014-10-10/coca-cola-hits-record-as-investors-seek-safety.html?cmpid=yhoo, (accessed Oct. 13, 2014).