Say NO to Coca-Cola

Coca-Cola Co., a nonalcoholic beverage company is traded on NYSE under the symbol of KO and I believe it must be AVOIDED.

Coca-Cola Co. is a big player in the business of manufacturing, distribution, and marketing of nonalcoholic beverage concentrates and syrups. In the absolute sense, KO has strong fundamentals. Coca-Cola Co. recently reported gross profit margin of ~ 66 % (greater than the industrial average) and quarterly revenue growth of ~ 7% (on par with the industrial average). Though Coca-Cola does clear the first pass of being a good investment choice, one must look beyond its financials. Besides, companies function in a competitive environment and this makes the complete analysis of the industry important and necessary.

Paying closer attention to other players in the soft drink business such as PepsiCo Inc. (PEP) and Jones Soda Co. (JSDA) changes the entire investment strategy.

Fundamentally, I believe PEP is the strongest. One parameter all investors care about the most is earnings per share (EPS). Greater EPS implies more value being returned to shareholders. EPS for PEP is 3.34, which is greater than the industrial average (0.9) as well as EPS for KO (2.16) and JSDA (0.186). Another plus for Pepsi is its efficient management. Return on equity (ROE), indicative of business efficiency, is greatest for PEP (~ 38%) compared to KO (~ 30%) and JSDA (~ 19%). Also, Pepsi is the cheapest in the group. The price to earnings ratio (P/E) for PEP is 18.79, lower than that of KO (21.89) and JSDA (107.63). Another fairvalue indicator, the PEG ratio for PEP is 1.71, which is lower than that of KO and JSDA. Both KO and JSDA have PEG ratio > 2 (KO PEG = 2.3 and JSDA PEG = 2.84), which means that they are currently traded at a premium twice its expected growth.

Other than better fundamentals I also like Pepsi because of its bigger product line compared to that of KO or JSDA. In addition to carbonated, noncarbonated and sports drinks, PepsiCo also offers a wide variety of chips and ready-to-eat cereals.

Though Jones Soda is fundamentally not as strong as PEP or KO and is the most expensive in the lot (with a triple digit P/E ratio), I still believe it is a good investment choice. I like Jones Soda because it is a relatively new company (JSDA was founded in 1986 and is about 100 years younger than the two Cola giants). And, where the multinationals PEP and KO have already penetrated most of the markets, Jones Soda predominantly serves Northern America (United States and Canada), and thus has high potential for growth and expansion worldwide. Also, I believe Jones Soda Co. is doing a great job marketing its products as "healthy". JSDA uses pure cane sugar instead of high fructose syrup (predominantly used throughout the industry), and thus has been able to lure the increasingly health conscious market. I believe this sets Jones Soda apart from its competitors and in effect gives it an edge over others in the industry. As a result, the market share for Jones Soda is increasing. JSDA has been able to increase its gross profit margin from 34.6% in 2005 to 39.2 % in 2006. Also, its EPS increased by 217% in 2006 compared to 2005.

In addition to the fundamental analysis, basic technical analysis also favors PEP and JSDA over KO. For the last 5 years Coca-Cola stock has moved sideways losing more than 10% in value. In the same period JSDA has gained more than 2000% and PEP has gained more than 20%. Basic charting shows that PEP correlates very well with the S&P 500 index and thus is a great defensive stock, while JSDA has the got the momentum.

Bottom line, Coca-Cola has lost its mojo and in my opinion investors should switch from KO to the best in the class. I believe both PEP (the best defensive soft-drink stock) and JSDA (the soft-drink stock with high growth potential) will beat KO in coming years.

Playing the Falling Market

Last week, we witnessed the greatest fall on the Street since 9/11, which started as a reaction to China's sell-off. Market's hard fall has led to massive selling which is a result of panic attack among investors. DOW is down by more than 500 points and NASDAQ has fallen more than 100 points. European and Asian markets haven't escaped this fall either.

This global market downturn has stressed one question always lingering over any investor's mind - is it just a correction or beginning of a recession? I believe the worst is not over yet and the market should bottom soon. This creates some buying opportunities for investors in the near future.

So, let’s go bargain shopping.

There is consensus among the Street analysts and economists that the US economy is slowing and will continue to grow at a moderate pace (slower than 2006). Also, there is a growing concern regarding the state of subprime lending market and with inflation still above the comfort zone of Federal Reserve, rate cuts are yet not in the picture. I believe it is time to play defense, which means that investors should look into buying good dividend yielding undervalued stocks.

My number one pick is Altria Inc. (MO). I like the smoke king because it pays a good dividend (yield = 4.1%) and has a strong balance sheet. Also, beta (a volatility measure in relation to the entire market) for Altria Inc. is low. For more information please read my previous post on MO.
http://happyinvestingposts.blogspot.com/2007/01/smokin-altria_10.html.

In such a turbulent time, I think investors should invest in defensive stocks such as PepsiCo Inc. (PEP). I like Pepsi because no matter where the global economy is headed, general population will continue to consume food items and drink soda. Also, the outlook for international markets still remains positive and this is good news for the food and beverage multinational.

I also like Exxon Mobile Corp. (XOM). XOM is down 9 points from its one year high and is undervalued. Exxon Mobile should continue to benefit from high demand for oil and increasing oil prices. One positive indication for Exxon Mobile is that the management is buying back its stock right here right now, which means that it believes in its future. Another thing worth mentioning is the fact that all big institutions have always loved the oil giant. Exxon Mobile Corp. is one of the most held stocks in mutual funds and as long as the mutual funds like it, XOM is going higher.

Bottom line, when the market is hard on you, play defense. In my opinion, all three MO, PEP and XOM are BUYs.