Coca-Cola shares showing a sell signal

Among beverage companies, despite having some of the strongest growth, KO stock has started to break support.

By Stock Traders Daily Aug 28, 2013 11:20AM

Stock market report (© Corbis)By Neal Rau, Stock Traders Daily, Trading Reports

Over the past decade, the obesity epidemic has officially brought soda drinks under fire. Sales at beverage giants PepsiCo (PEP) and The Coca-Cola Company (KO) have been slipping due to changing consumer preferences and increasing health consciousness. Which beverage companies stocks are best positioned for growth despite a stall in soda sales?

You would think that if health concerns are steering customers away from soda that diet soda sales would be less affected, but the opposite is true. Diet Coke volumes were down 3% last year, Diet Dr Pepper sales were down 2% and Diet Pepsi down over 6%. Since the beginning of May, the stock price for Pepsi declined about 3.5% and Coca-Cola stock fell about 9%. Both are currently testing mid-term support.

Diet sodas contain artificial sweeteners and other chemicals that have received bad press over the years. There was even a proposal put forth in the state of New York that would impose an 18% excise tax on all non-diet soda sales. Coca-cola and Pepsi have been able to mitigate the effects of a declining U.S. market through expansion of their sales abroad in regions such as Asia, where demand is still growing and consumers are not as health conscious.

However, instead of relying on soda sales, Coke has been expanding into the energy drink segment. Red Bull and Monster Beverage (MNST) are the most recognizable names, but Coca Cola's energy drink portfolio of Full Throttle and Nos is doing well. Although this category's growth has slowed down recently, Monster Beverage still reported 6.5% higher sales, and Coca-Cola reported 5% volume growth in energy drinks. PepsiCo and Dr Pepper Snapple (DPS) do not have a large presence in energy drinks yet.

Pepsi does have non-carbonated tea brands like Lipton and Brisk, and Dr Pepper Snapple has the Snapple brand, but Coca-Cola is reporting the strongest volume growth in this category. Coca Cola's Gold Peak and Honest Tea brands reported volume growth of 10%, and by comparison, PepsiCo reported that non-carbonated beverage volume was actually down 2%, and Snapple's volume was up just 4%. Coca-Cola is also debuting a bottled "herbal tea" drink in Thailand named Habu.

Coca-Cola is the leader in both sparkling and still beverages and has the highest gross margin of the group. Coca-Cola trades with a 21 price-to-earnings ratio, which is a premium to the industry, as well as the S&P 500 Index (SPX). Being the most powerful brand in the world allows the company to perform in any economic environment, but that does not mean the stock is a buy. In fact, according to the real time report offered by Stock Traders Daily, long-term support has just broken lower, which raised sell/short signals. As long as the stock remains below long-term support, we expect Coca-Cola shares to trade lower.

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