Coke Gets A Leg Up On Pepsi

03/10/05 08:23:23 AM

by Arthur Hill

Coca-Cola performed poorly in 2004, but the stock has recovered in 2005 to fill a gap and start outperforming Pepsi.

Security: KO
Position: Buy

Two players with a fierce rivalry dominate the soft-drink industry: Coca-Cola (KO) and Pepsi (PEP). While growth in the industry overall should benefit both players, there are often times when one player will benefit at the expense of the other. A simple price relative, which compares one stock against the other, can identify the so-called winner.

This price relative compares the performance of KO relative to PEP (Figure 1). The price relative declined until January 2005, and this indicated that KO was underperforming PEP. The decline slowed considerably in late 2004 and turned up in February. Most recently, the price relative moved above its December high and KO is outperforming PEP for the first time in months.

Figure 1: KO vs. PEP. This price relative compares the performance of Coca-Cola relative to Pepsi. The price relative declined until January 2005, and this indicated that KO was underperforming PEP. The decline slowed considerably in late 2004 and turned up in February. Most recently, the price relative moved above its December high and KO is outperforming PEP for the first time in months.

Graphic provided by: MetaStock.

Graphic provided by: Reuters Data.

Turning to the actual price chart, KO bottomed in October and has been working its way higher the last 4-5 months. The advance filled the September gap and exceeded the reaction highs from November and December (red arrows). Even though the advance has been slow, it has been steady and the new highs are bullish. The July gap was never filled and the ability to fill the September gap is worth noting.

As long as key support holds, the prospects are bullish for KO and I would expect the stock to work its way toward 46-47. The blue trendline extending up from the October lows defines the rate of ascent and the current uptrend. In addition, there is support from broken resistance that converges at 42. Further strength should be expected as long as 42 holds.

Arthur Hill

Arthur Hill is currently editor of TDTrader.com, a website specializing in trading strategies, sector/industry specific breadth stats and overall technical analysis. He passed the Society of Technical Analysts (STA London) diploma exam with distinction is a Certified Financial Technician (CFTe). Prior to TD Trader, he was the Chief Technical Analyst for Stockcharts.com and the main contributor to the ChartSchool.

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