Coca-Cola Company (KO)

(A Top Pick March 16/16. Down 2%.) This really didn’t go anywhere to excite him. He now prefers Pepsi (PEP-N), which is a bit more dynamic.

Iconic brand with consistent return on equity. Buffet owns a large position. This is a buy, hold and forget-about stock. They spent decades building their distribution network and it is one of their strengths, besides their recipe.

He is not a fan and prefers PEP-N. KO-N is almost exclusively a soft drink company. Soft drinks are under attack and in decline as people move more and more towards water. He does not care for the outlook. Pepsi gets most of its earnings from food – Lays and Quaker.

A sort of serial under performer. From a fundamental basis, it hasn’t made much progress at all, on revenues, margins, earnings, cash flow. They are trying to move away from sugary water and to become healthier. Not doing as good a job as Pepsi has done, and it shows. There is so much more opportunity out there to buy good quality companies that are organically growing with great management and reasonably priced.

This typically does very well in the summer. Currently it is in a trading range. You want to watch this trading range, and if it starts to move above the range, it could be an interesting seasonal trade in about June right through until September or October.

It is a really tough business. It has a nice little rounded base on the 20 year chart. Deterioration happened in September in the industry. He does not see tones of catalysts. You have to buy when valuations are in your favour.

Sectors that started performing better than the rest of the market in June 2016, were transports, industrials, financials, technology and materials. These are the groups that are positively correlated to rising inflation and rising real interest rates. They are the most economically sensitive sectors. Earnings have been improving for the last three quarters. Where money is coming from and going to come are sectors that benefit in low interest rates and low growth, to sectors that benefit in higher growth and a little higher inflation. Consumer staples don’t fit that category, and are being used as a source of funds. Doesn’t think you will get hurt badly with this, but feels you are just missing out.

A wonderful company, slow growth, very expensive and a low dividend yield. He wouldn’t own it. There are other areas of the market that are much more enticing. Dividend yield of 3.4%.

A consumer staple name, which will probably be affected by a couple of things. Since April it has been having lower lows and lower highs. It has broken below its 200-day moving average, and the 200-day moving average is starting to turn downwards. Trading at a forward PE of 20X earnings. Growth rate is probably mid-single digits, which gives it 4X on a PEG ratio basis, which is not cheap.

This is a yesterday stock. It is almost 100% beverages with the vast majority being sugar water, a market that is in decline. They don’t have the diversification that PepsiCo (PEP-N) has, and he prefers PepsiCo.

Something that he feels has staying power is the re-franchising of the bottlers. Six-seven years ago, there was a real disconnect between corporate selling the concentrates and the bottlers, and distribution was not working well. The company took them all in and fixed them. Bottling is a capital intensive business, so they are now going to push it back out and refranchise. There will be an increase in margins and less capital intensity. Dividend yield of 3.04%.

Largest beverage company in the world, strong brand-driven assets that make competition coming in very difficult. He just entered this trade as it broke out from 2015 highs. Fantastic company with a good yield. The space is doing very well.

Coca-Cola (KO-N) or PepsiCo (PEP-N)? The key difference is that Pepsi has a more established non-beverage business. Coke has not done as well, but has a more established bottling business, with about 15% of business coming from this. It is a low margin high capital business and there are rumours that they will be getting out of this. Would prefer Dr. Pepper Snapple Group (DPS-N) which has about a 10^th of the market share of these 2, so there is an opportunity to steal market share.

Coca-Cola (KO-N) or PepsiCo (PEP-N) for a long-term investment? He doesn’t care for either. His choice would be Dr. Pepper Snapple (DPS-N). This company generates one 3^rd of its revenue from bottling, a capital intensive business. They took a 16% stake in Keurig Mountain which has really struggled. Carbonated beverage consumption is going down.

Short? He doesn’t short individual stocks. This is trading at 21X forward earnings with the 10 year average of about 17X. A bit pricier at this point, especially with its growth rate. Also, their revenues are 60% from outside of the US. There would be some headwinds if the US$ continues to move higher. Doesn’t particularly like the name at this point. 3% dividend is pretty safe.