After stumbling through uncharacteristically weak financial performances, particularly in the all-important earnings per share department, Coca-Cola (NYSE : KO) stock has gained some healthy near-term momentum, giving hope to loyal investors looking to recoup losses from a major one-day loss back two weeks ago. Rumors of a leveraged buy-out was initiated by analysts from Nomura Securities, who raised their share-price target to $54 from an original $51.50.
An actualized LBO, according to the investment firm, would have the potential of skyrocketing valuations above $90 and quadrupling its market capitalization, which currently stands at $180 billion. The story was featured on CrushTheStreet.com’s Weekly Market Wrapup, along with several mainstream news outlets. Now what’s left for investors is to decide whether or not to engage this enticing Big Board opportunity.
While this is primarily an article focused on the technical nature of Coca-Cola’s price dynamics, the fundamentals cannot be ignored. After all, the LBO rumor, thanks to a singular source, is driving the discussion and the sentiment in the marketplace. Because of this, the latest wave of optimism is arguably tenuous: a firm denial coupled with evidentiary statements could reverse the trend rather quickly. Of course, official press releases that toy with the idea, or even complete silence on the matter, could fan bullish passions as well.
Technically, the circumstances are a little more intriguing. After a severe gap-down loss on October 21st of this year, where the market opens the price at a point lower than the entire trading range of the previous session, subsequent transactions have placed the current valuation of Coca-Cola above this initial gap-down point. That’s the good news. The bit that’s more challenging to decipher is the ultimate trajectory, as both the bulls and bears are entangled in between the 50 day moving average at the top and the 200 DMA at the bottom.
Recent history would suggest that a break-out move is imminent. A few months prior in July, Coca-Cola shares battled a sudden bout of volatility following sub-par performances against financial metrics. However, valuations recovered dramatically, moving up 15-percent from the bottom of the “volatility spike” to the rally’s peak. Needless to say, those that bought into the discounted prices of an iconic American company were rewarded handsomely.
Unlike real history, market history may or may not repeat itself. It is worth noting, though, that over the last several years, Coke shares have enjoyed a generally steady and bullish trend channel. The dips that have occurred, while admittedly nerve-wracking when experienced in the heat of the moment, has resulted in large upward swings. Fundamentally, the company is very potent, with some nagging issues such as revenue underperformance against industry averages outweighed by core strengths in several departments.
Finally, the derivatives market has been awash in excited activity, with many traders ramping up on near-term call options. In the immediacy of a market move, it may not make much sense to bet against the tide, with smart money investors likely to ride momentum before pulling out at an opportune time. If executed properly, this swing-trade idea has the potential to net five to ten percent over a short time period.