Coca-Cola Perfectly Positioned for Breakout

Dow component Coca-Cola Co. (KO) is trading lower with U.S. stocks on Tuesday morning but looks are deceiving because the beverage icon is perfectly positioned to complete a rally into 2020’s all-time high and enter a strong uptrend. Seasonality is lending a hand in the uptick, with dividend plays often attracting buying interest in the second and third quarters, as investors sell first half winners and park profits until new opportunities arise.

Pandemic Pummeling

Revenues got battered through most of 2020, with lucrative sports franchises and stadium deals gathering dust due to pandemic shutdowns. Restaurant closures also compounded losses, along with an overly-narrow product line, at least compared to rival PepsiCo Inc. (PEP). The venerable Coke machine even took a hit because thirsty customers were reluctant to hold physical coins and bills or touch potentially-infectious plastic surfaces.

The current downturn in world markets should add to upside in coming months, with growing worries about inflation and over-valuation triggering a flight to safety. However, we can’t rule out the adverse impact of surging agricultural prices, which could undermine profit margins in coming quarters. Even so, it could be a blessing in disguise because targeted price increases have the power to overcome those headwinds and add to the bottom line.

Wall Street and Technical Outlook

Wall Street is getting the message, lifting consensus to a ‘Moderate Buy’ and $60 target. CEO James Quincy supported that bullish analysis in an interview last month, stating the company will exceed guidance if the second quarter strength matches Q1 results. However, he admitted that cost pressures could have an impact as economies reopen and demand rises but said the company will “manage price increases” to maintain profitability.

Coca-Cola completed a round trip into the 1998 high in the 40s in 2013 and entered a multiyear test, finally clearing resistance in 2019. It failed the breakout after posting an all-time high at 60.13 in February 2020, dropping 40% in just five weeks. A slow motion recovery wave reached major Fibonacci resistance in December, yielding a pullback, followed by a bounce that’s now testing that harmonic barrier.

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Disclosure: the author held no positions in aforementioned securities at the time of publication.