Ed Schipul Attributes

“With this, our focus on consumer-centric innovation, almost 25% of our revenue is now from new or reformulated
products, up from 15% two years ago. “

— James Quincey
Chairman & Chief Executive Officer

No matter where you’re from the chances you’ve enjoyed the sweet crisp taste of a Coke on a hot afternoon is extraordinary high. If you’re unfamiliar Coke works in a very interesting and different way than other soft drink beverage providers.

Geographically Coke is split into several different operating entities, however the main being a concentrate company and the other being a bottling manufacture. Coca-Cola operates by selling concentrates to independently operated but authorized and quality assured bottling companies whom mix the concentrates to formulate both sodas, carbonated water, and drinks like Sprite, Fanta, Vitamin-water, Dasani, Fair-life, Ciel, Minute maid, Simply Juices, Surge, Zico Coconut Water, Odwalla Juices, Powerade, and many more products.

The first thing that comes to mind when you think of Coca-Cola is definitely soda but what about coffee and energy drinks? That’s right!

The giant Coca-Cola has officially entered the coffee and energy drink world and so far (though still early) it’s been a success. With an acquisition of Costa Coffee officially closed in January 2019 valued at 5.1 Billion dollars we’ve already seen a slight boost in the Q2 2019 earnings release, a quote from CEO James Quincey reads as followed “As we move forward on these opportunities, our focus is on accelerating three segments: The Express vending machines, beans and machines for food service customers, and ready-to-drink products.”

Now it doesn’t pay to hype up Costa Coffee as a major source of revenue just yet but entering the ready-to-drink coffee market is an amazing idea and there is not many more financially sound companies to pose as a competitor in this field. Below is a list of the beverage – soft drink sector in descending form weighted by market cap. Amongst coffee Coca-Cola has also entered the energy drink market. Recently legislations passed in Republic of Lithuania and the Republic of Latvia banned sales of 150+ mg caffeinated energy drinks to people under the ages of 18, however Coke like Red Bull decided to go with 80mg per 250 ML can so this would not effect their business model as they offer a lesser caffeine dosage than say Monster, Bang, or Rockstar.

This isn’t the only reason KO is attractive, if we take a look KO common stock offers a 2.94% dividend yield compared to the SPY dividend return of 1.88%.

Now let’s not get to carried away, it’s important to note that on a long term scale KO has underperformed the SPY in terms of percentage gain over a 5 year term, while KO has risen 28% in 5 years, the SPY has risen over 42%. Now there are a few ways you can look at this depending on where you’re attempting to place your bias, you could argue that during that time the return on capital invested may in KO due to higher dividend yields was more attractive to you. Let’s take a look at this mock back tested portfolio created on portfoliovisualizer.com from Jan 2015 – Jul 2019. Originally capital of 10,000 dollars, portfolio 1 consist solely of the SPY and portfolio 2 solely KO. Now let’s clarify, we don’t believe you should ever be solely invested in 1 equity, that is a recipe for disaster. Here is an article of John C Bogle’s investment approach.

Chart from PortfolioVisualizer.com

Since this may be hard to read it reads as followed

PortfolioInitial BalanceFinal BalanceCAGRStdevBest YearWorst YearMax. DrawdownSharpe RatioSortino RatioUS Mkt Correlation
SPY (1)$10,000$15,822 10.53% 12.30%21.70%-4.56%-13.52% 0.801.251.00
KO (2)$10,000$14,459 8.38% 12.39%14.37%-0.34%-10.87% 0.640.980.41

Below is a Log scale – inflation adjusted portfolio growth showing the difference in performance. The Blue (1) is the SPY and the Red (2) is KO

Chart from PortfolioVisualizer.com

What is very interesting is the fact that Coca-Cola (KO) saw much less drawdowns in times where the market stumbled, this shows the resilience by KO and the fact that in times of hardships, assets continue to do extremely well. Some may consider this quality “recession proof like”. A long term holder and continuously outspoken bull on the stock is Warren Buffett as Berkshire Hathaway holds an extremely large position. Here is an article where Mr. Buffett explains that there aren’t many Coca-Colas. This drives Warren’s point home in the fact that “if you own a really good business and understand that bad things won’t happen to that business then that’s really it.”

Now there is a downside to this, let’s assume you’ve done your adequate research on the financials of KO, you want to purchase shares because you believe the management is capable and the pipeline looks bright for the future. In this case KO is entering the coffee market and energy market (they’ve already tried energy drinks but not directly labeled under Coca-Cola’s brand) this does put them in a little bit of a conflicting position as Coca-Cola owns a large portion of MNST Monster Energy stock, though now as they’re entering as a competitor to Monster, they don’t plan on dropping their ownership or reducing it by any. This can be seen as a hedge against their product, clearly they like the caffeinated soft-drink market and want to be in it regardless of which company it is but if they do in-fact capitalize on both Coffee and Energy it really could be huge. But let’s get back to the problem, you can’t really get the shares to cheap. The problem with this .40 beta market position, is when the market sells off KO is usually reluctant too.

I’m reluctant to use the term human nature but there seems to be a reluctancy to purchase shares when they’re trading near highs. While the old expression “buy low, sell high” holds true I think it’s important to ask the question “why is this making new highs”. You may find the answer to be because it’s a sound company with growing profitability and a prominent market share. Now you should also be prepared to ask yourself the question on the stock you may be contemplating on purchasing solely because the particular equity has been depressed for some time and surely a change must be coming soon, “why is this making new lows”. Now you should wait a second before you quickly come up with an answer to that, what are you trying to get from this position? A quick buck? Because if you’re buying a depressed equity that has been in a downtrend for some months to years in the expectations that for some reason a reversal is coming and you have the ability to detect it maybe you should stop. A wonderful quote by Jack Bogle from The Vanguard Group “I don’t know anybody who’s ever been successful in timing the market, I don’t even know anybody who knows anybody who was ever been successful in timing the market.” So with this I say looking for the best financially sound company with a proven track record that is making new highs is always going to be the better investment than the 2nd-grade stock making new lows that you may be trying to time for a larger return.

Disclaimer: This is solely my opinion and not financial or investment advice. I currently hold no position on $KO, $SPY, or $COKE at the time this article was written.

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