News Analysis date published New: 
Monday, February 14, 2011 - 07:30
New Date created: 
Monday, February 14, 2011 - 07:30
New Date last updated: 
Monday, February 14, 2011 - 07:30

How to Trade Coca-Cola for a Quick 12% Gain

Monday, February 14, 2011 - 7:30am

This iconic brand has a chequered history.

Invented in the late 19th century, it was a marketed as a medicine that contained wine and cocaine.

When prohibition set in, a non-alcoholic alternative had to be created. Later, the cocaine was replaced by a non-narcotic extract of the coca leaf that is still used today.

Originally sold for just $0.05, this patented miracle formula claimed to cure headaches, morphine addiction and even impotence. As a perceived health cure-all, it quickly gained widespread appeal. People literally drank it up.
The company is now one of the most recognized brands on the planet -- Coca-Cola (NYSE: KO) -- the world's biggest soft drink maker.

With a powerful global distribution network, Coca-Cola products are today sold in more than 200 countries and boast 500 different beverage brands.
In the coming years, more than $20 billion will be spent to expand into emerging markets like Africa, Russia, Mexico and China.

Helping drive growth is the recent acquisition of Coca-Cola Enterprises, the company's largest bottling unit in North America. Through the acquisition, Coke expects to improve business operations by better controlling product distribution so it can more quickly respond to changing market demand.

For example, it will now be cheaper for the company to produce and bottle smaller scale products -- like the 100-calorie Coke can -- to cater to calorie-conscious consumers.

As a result, Coke expects to save more than $350 million a year for the next four years. These savings should mean good news for shareholders.

Technically, KO appears strong. The stock is in a Major uptrend (marked on chart) and appears to be forming a bullish basing pattern (labelled on chart with the dotted line).

In June 2010, the stock began to soar, forming an accelerated uptrend line (marked on chart). However, in early November 2010, KO encountered resistance near $65.88.

After quickly falling to support near $61.89, the stock has been basing near this level for most of 2011.

However, during the February 7 trading week, after reporting upbeat earnings, KO appears to be lifting off support and breaking the minor downtrend line in the process.

If KO can bullishly emerge out of the basing pattern, the measuring principle -- calculated by measuring the height of the pattern from the breakout level -- projects a price target of at least $69.87 ($65.88 - $61.89 = $3.99; $3.99 + $65.88 = $69.87).

However, with no near-term resistance in sight, the stock could rise to its 1998 peak of $73.53.

The world's largest soft drink company is also fundamentally strong.

On Wednesday, February 9, the Atlanta-based company reported strong fourth-quarter and full-year 2010 results.

Fourth-quarter revenue increased 40% to $10.5 billion, from $7.5 billion in the year-ago quarter. Analysts expected a more modest revenue gain of $10.2 billion. With about 75% of revenue coming from abroad, sales in Eurasia and Africa were particularly strong, increasing by 14%. Additional growth was spurred by increased North American consumption of healthier beverages like Coke Zero, fruit juices, Powerade and bottled water.

For the full-year, revenue increased 13.6% to $35.2 billion, from $31 billion last year.

With plans to expand into countries like Norway and Sweden, analysts project full-year 2011 revenue will surge a further 29.8% to $44.9 billion.

The earnings outlook seems similarly strong.

Due to strong North American sales, and following successful integration of its Coca-Cola Enterprises bottling division, the soft drink giant reported a 9% % fourth quarter earnings increase. Earnings rose to $0.72 (excluding special items), from $0.66 in the year-ago quarter.

For the full 2010 year, adjusted earnings were up 19% to $3.49, from $2.93 last year. In 2011, as the company continues to expand internationally, it expects earnings to rise at least a further 10% to $3.85.

In addition to a strong growth outlook, Coca-Cola offers an attractive forward annual yield of about 2.8%. The company has increased its dividend every year for the past 17 years.

Action to Take-->
Since Coca-Cola is fundamentally and technically attractive, traders could go long on this stock and possibly see a nice gain. Here's how:

Place a buy-on-stop order at $65.91, just above current resistance. This means if KO does not hit or go above $65.91, I would not enter the position. Your stop-loss could be set at $61.87, just below current support. My target is the stock's nearby 20-year high of $73.53, good for a gain of about 12% based on recent prices.

Melvin Pasternak does not personally hold positions in any securities mentioned in this article.
StreetAuthority LLC does not hold positions in any securities mentioned in this article.

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