Coca-Cola - A Value Stock?

Written by Henry To


There has been much talk lately about Coca-Cola and its potential as a value stock – as it now spots a dividend yield of 2.6% (which isrepparttar highest dividend yield sincerepparttar 111904 late 1980s) and a P/E or less than 21 – right atrepparttar 111905 bottom of its five-year low. Moreover,repparttar 111906 current price of approximately $43 a share is also nearrepparttar 111907 bottom of its nine-year range – (nine years ago,repparttar 111908 last former great CEO of Coke, Roberto Goizueta, was still atrepparttar 111909 helm ofrepparttar 111910 company). Sure, Coke has had its own set of problems, but it is a great company, they would argue – and heck, Warren Buffett is also an owner of Coke shares.

Don’t get me wrong. I really like Coke as a company. Its brand is as American as can be, and yet over 70% of all its sales are derived from outside of North America. The country withrepparttar 111911 highest consumption per capita of Coca-Cola is Mexico. According to Interbrand.com,repparttar 111912 brand name of Coca-Cola is worth approximately $67 billion and isrepparttar 111913 world’s number one brand name. Who could forgetrepparttar 111914 famous declaration of Coke’s patriarch, Robert Woodruff? Whenrepparttar 111915 United States maderepparttar 111916 decision to enter World War II, he placed his hand on his heart and famously declared that he would “see that every man in uniform gets a bottle of Coca-Cola for five cents wherever he is and whatever it costs.” Of course, it didn’t hurt that Woodruff’s friend, General Dwight Eisenhower, was a great promoter of Coke as well. Byrepparttar 111917 timerepparttar 111918 war ended, hundreds of thousands of fighting men and women became a fan of Coca-Cola forrepparttar 111919 rest of their lives.

Underrepparttar 111920 leadership of Goizueta, Don Keough, and Doug Ivester, Coca-Cola emerged as a growth and must-own stock duringrepparttar 111921 late 1980s and up torepparttar 111922 mid to late 1990s.  Keough wasrepparttar 111923 great motivational speaker, while Goizueta was unmatched in his ability to “manage”repparttar 111924 stock price andrepparttar 111925 Wall Street analysts who coveredrepparttar 111926 non-alcoholic beverage industry and Coca-Cola. Goizueta had a habit of watchingrepparttar 111927 stock price of Coca-Cola on an intraday basis on a computer in Coke’s headquarters. When Warren Buffett was buying shares of Coca-Cola back in 1988, he and Keough figured it out by watchingrepparttar 111928 action ofrepparttar 111929 trading and tracing those purchases to a broker based in Omaha. Ivester, a former accountant, could have been regarded as a great financial alchemist. Underrepparttar 111930 financial leadership of Ivester, Coca-Cola bought out many of its bottlers and namedrepparttar 111931 entity as Coca-Cola Enterprises. The bottler went public in November 1986.

When Coca-Cola Enterprises (CCE) went public, Coca-Cola (the company) owned 49% of its outstanding shares. Because of this, Coca-Cola hadrepparttar 111932 ability to raise syrup prices at will (the former agreement mandated that Coca-Cola only adjusted its price to match inflation for its syrup inrepparttar 111933 North American market) – thus squeezingrepparttar 111934 profit margins ofrepparttar 111935 bottler but increasing its own revenues and profits. The stroke of genius was this: Because ofrepparttar 111936 fact that Coca-Cola only owned 49% of CCE, it did not have to consolidate any of its financial statements with CCE. Atrepparttar 111937 time, not one single analyst totally understood this relationship. Year-after-year,repparttar 111938 company delivered. Goizueta carefully (personally) managed allrepparttar 111939 information that came out of Coca-Cola. He would personally call Wall Street analysts. Any analyst that dared to question him openly or disagree with Coca-Cola’s earnings projections would be rebuffed. One such analyst was Allan Kaplan from Merrill Lynch, who at one point wrote a note to his clients observing that Coca-Cola may be depending on Japan for too much of its profits. When Goizueta found out aboutrepparttar 111940 note, he responded angrily with letters to both Kaplan and his bosses at Merrill Lynch. Kaplan was banned from attending analyst meetings at Coca-Cola for more than a year. From that point on, analysts knew not to mess with Goizueta and Coca-Cola.

Keough officially retired in 1993 while Goizueta passed away in October 1997 – succumbing to lung cancer. Ivester succeeded as CEO but behindrepparttar 111941 scenes,repparttar 111942 company was in disarrays. People loyal to Keough and to Ivester clashed – withrepparttar 111943 former group bearingrepparttar 111944 brunt ofrepparttar 111945 hardship. The current CEO, Neville Isdell (who was loyal to Keough andrepparttar 111946 only true competitor forrepparttar 111947 top job back then) was sent into “exile” to Great Britain to head up a bottler. According to a recent Fortune article, “The biggest problem [with Ivester], though, was his tin ear. Ivester was high in IQ but terribly short on EQ. A self-made, stubborn, very shy son of North Georgia millworkers, he had gotten where he was through brains and hard work. He resented Keough's grandstanding, say people who knew him well, and never fully appreciatedrepparttar 111948 importance of Goizueta's almost daily chats with directors. (Ivester declined to comment.) Before long, head-down and full tilt in a turbulent market, Ivester had alienated European regulators, executives at big customers like Wal-Mart and Disney, and some big bottlers, including Coca-Cola Enterprises (on whose board sat Warren Buffett's son Howard). As he raced to put out fires, he became increasingly isolated from his own board of directors. One person was keeping in touch with them, though, even in his retirement—Don Keough.”



The Myth of Option Expiry

Written by Guy Bower


I recently readrepparttar following statement on a website that sells an expensive option trading system:

“70% of options expire worthless torepparttar 111903 buyer! That means 70% expire profitable torepparttar 111904 seller.”

Garbage! Unbelievable garbage! Absolutely unbelievable garbage! The logic in this statement is just plain incorrect and of courserepparttar 111905 website does not have statistics to back their claim.

To be fair this website was notrepparttar 111906 only place I have come across a statement like this. I have in fact seen a figure of up to 90% quoted. However even if it is a common belief does not make it correct.

Let’s first have a think aboutrepparttar 111907 logic, then let’s look at some stats and come to some real conclusions.

Profit Logic Let’s assume 70% of options do expire worthless. How can anyone draw conclusions as torepparttar 111908 profitability of a long trade or a short trade? You simply cannot.

If you sell an option at say 10pts, you could then watch it go to 100 or 200pts and wipe out allrepparttar 111909 money in your account. The market may then turn around and eventually seerepparttar 111910 option expire worthless, but that does not mean your trade has been profitable. This is not nit picking. This is real life trading - things move up and down and you cannot always afford to sit on a position and hope for a zero value at expiry.

It is simply not possible to draw a conclusion about profitability based on expiration statistics.

The statistics In a book entitled Options on Futures by Summa and Lubow they quoterepparttar 111911 80% figure and it is backed up by numbers fromrepparttar 111912 Chicago Mercantile Exchange (CME).

In a section entitled “The Numbers Speak for Themselves”, they show a table of data sourced fromrepparttar 111913 CME. The numbers representrepparttar 111914 percentage of options that expire worthless. The data fromrepparttar 111915 book is as follows:

YearCME optionsS&P optionsS&P putsS&P calls 199776.381.794.154.8 199875.882.293.143.9 199977.584.794.566.7 1997-9976.683.394.055.3

Assuming we have no reasonrepparttar 111916 doubt these statistics, then this seems to back uprepparttar 111917 popular belief. On careful reading however, it appearsrepparttar 111918 figures represent only those options that are held to expiration and not those that are closed out OR exercised before expiration (remember we are dealing with American style options here so some can be exercised before expiration).

Maybe we do not haverepparttar 111919 whole picture...

I also came across some more stats fromrepparttar 111920 Chicago Board Options Exchange (CBOE) that I thought were interesting. Their figures are: •Approximately 10% of options are exercised; •50-60% of options positions are closed prior to expiration; •The remaining (about 30 – 40%) are held to expiry.

At first these figures might look rather contradictory, but they are not. The CME numbers are based on options that are held to expiry. That is they do not include options that are exercised or closed before expiry – and that’s 60-70% of all options according torepparttar 111921 CBOE.

If we take both exchange’s statistics as fact, then drawing a conclusion from onlyrepparttar 111922 expiry numbers could be a bit biased.

Think aboutrepparttar 111923 CBOE numbers for a moment. The 10% that are exercised early would in all but very rare cases be in-the-money (why else would you exercise?) If we assume therefore that only in-the-money options are exercised, then this would leave more out-of-the-money options heading to expiry than in-the-money.

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