Our previous analyses of Dow Industrial members revealed that several companies are in a very good position to benefit from improving economic momentum. Coca-Cola (KO) is yet another stock poised to get a boost from the business cycle. Using a quantitative framework, we show that the stock offers a great mix of attractive return and a high margin of safety over the next 6-12 months.
For those who did not have a chance to go through our previous articles, we briefly outlined the employed procedures. We analyzed stocks in the context of the business cycle or, in other words, in the context of fluctuations in output growth. In practice, our quantitative framework can be split into two major components:
Forecasting the U.S. business cycle is accomplished by means of statistical modeling. The main tool in our toolbox – the monthly US GDP model – suggests that economic growth is likely to reaccelerate by the end of the summer.
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After the economic outlook is clarified, the next step is to quantify the impact of expected economic growth on Coca Cola's stock price. Using historical data, we find similar positions in past business cycles and collect evidence on how stocks reacted at that time. The data gathered are processed and used to generate possible outcomes. The process ends with price projections for the next six to twelve months.
Our calculations suggest that Coca-Cola should enjoy a positive economic outlook. By the end of the year, Coca-Cola is expected to reach $80 per share. Under the best case scenario, stock prices may reach almost $100; however, the probability of such a scenario is rather low. Most interestingly, simulation suggests that Coca Cola can deliver gains even under the worst case scenario. Since this type of safety is hard to find, we add Coca-Cola to our best picks along with Caterpillar (CAT) and General Electric (GE).
Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.
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