Catching a great company as it's just beginning an impressive
wave of growth can lead to a decade's worth of solid returns. Early
Microsoft (Nasdaq: MSFT)
Cisco Systems (Nasdaq: CSCO)
, for example, scored stunning gains. Yet these investors were
eventually compelled to book profits as those stocks peaked a
number of years ago and now trade at lower levels.
The fact that these stocks gave investors a good 10-year run is
surely impressive. And the fact that
has been producing solid investment returns decade after decade
after decade is nothing short of miraculous. Anybody betting
against this company at any time in the last half century would be
Still, there are some investors betting that now is the time to
head for the exits. In just the two weeks ended Aug. 15, the short
interest in Coca-Cola has nearly doubled from 23 millionshares to
43 million shares. That's the second-fastest growing short position
of any stock on the New York Stock Exchange (after Brazilian
Why would short sellers bet on a falling share price of this
global beverage maker? Scratch the surface, and you'llspot three
Sugar = the new tobacco
The first concern is fairly obvious. The United States and other
nations are finally waking up to the obesity epidemic. In a bid to
contain health care costs, diabetes and other ailments that are the
result of a poor diet are increasingly being targeted with
preventative measures. The easiest target: sugar-based soft drinks.
Of course, Coca-Cola has been working hard to diversify its
beverage roster away from Coke, but the company's flagship product
remains its top worldwide seller -- by a considerablemargin .
Increased awareness of the health concerns of sugar-based drinks
may already be affecting company results. Coca-Cola's sales rose
just 1.2% in the first three weeks of August compared with the
year-earlier period, according to Nielsen Scantrack. In effect,
this hardly looks like a growth category.
No longer a growth stock?
Which leads to the second concern: Is Coca-Cola still a growth
stock? The company has been able to boost sales at least 10% in
four of the past five years, though that was largely due to
acquisitions. Yet analysts expect sales to rise just 3.4% to $48.14
billion this year.
In a similar vein,earnings are expected to rise just 4% to about
$2 per share this year. Looking ahead to 2013, Coca-Cola's sales
are expected to grow about 5% to $50.6 billion, aided by an
expansion in the company's Fuze line of juice drinks. Earnings per
share should rise a more robust 9% to roughly $2.20.
Yet this is where short sellers may be focused. Coca-Cola has
historically been such a solid growth story, that investors were
willing to afford it a price-to-earnings (P/E ) ratio that is well
above its earnings growth rate (itsPEG ratio typically hovers near
But if Coca-Cola has finally matured, then a premium PEG is no
longer justified. For example, if Coca-Cola traded for just 12
timesforward earnings , then shares would be valued at about $26
(12 x $2.20), well below the current $38 share price. Even
amultiple of 15 implies aprice target of $33.
Another possible issue for short-sellers: Coca-Cola derives more
than half of its sales from abroad, and the dollar's recent
resilience could lead to foreign-exchange losses in the third
quarter. Analysts at Citigroup recently trimmed theirprofit
forecasts for Coca-Cola for 2012, 2013 and 2014 for just that
Lastly, Goldman Sachs says the entire beverage sector may be a
bit over-extended. "[Stocks in the] Beverages sector [have]
significantly outperformed the food sector year-to-date (12 pts)
and is now trading at a 20% premium to food versus its five-year
average of 5-10%." That helps explain why Goldman dropped its
sector view on beverage stocks on Aug. 12 from "attractive" to
"neutral." At that time, it also downgraded Coca-Cola to "neutral,"
noting that "relative valuation is at peak levels and a tough macro
backdrop and foreign exchange will limitEPS upside."
Risks to Consider:
As an upside risk, Coca-Cola has a habit of pulling off major
acquisitions that add the next leg to growth, so it could quickly
derail the short sellers' investment theses.
Action to Take -->
Only professional short sellers are likely to be emboldened enough
to short this stock. Yet the simple fact that they are targeting
Coca-Cola should be grounds enough for you to think about booking
profits in this long-term winner.
-- David Sterman
David Sterman does not personally hold positions in any
securities mentioned in this article. StreetAuthority LLC owns
shares of MSFT, CSCO, KO in one or more if its "real money"
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