My patience KO'd by Coca-Cola
OK, I admit it -- I get emotional sometimes. Last time I checked, I was a carbon-based organism whose basic genetic material was all twisted up into a helix and stored in the various nuclei of the plethora of cell structures in my body; I stand upright and have an opposable thumb; I have a brain full of higher-functioning capabilities, such as performing basic arithmetic operations and pondering the ultimate purpose of the universe. In other words, I'm human, and as such, I'm prone to the occasional mood swing.
I'm here today to talk about -- and offer a mea culpa regarding -- an article I wrote about one of my long-term holdings, Coca-Cola
The source of my emotional dismay
So, anyway, back to that article. I wrote it last September, when Coca-Cola issued some guidance that essentially said, "Hey, we got an update about case-volume growth, and guess what, stakeholders. you're not going to like it!" No, none of us did. I liked it about as much as Martha Stewart enjoyed making tablecloths from prison-stripe patterns.
I decided to express my exasperation in a come-on-guys-let's-get-with-the-program kind of article. I figured that would be the Foolish thing to do. My main argument centered on the company's marketing campaign -- its bland, listless, abject marketing campaign. As far as I was concerned, Coke's advertising endeavors were as hopeful and coherent as the gritty, surreal landscape of David Lynch's Eraserhead. I suggested that the executives down in Atlanta stop worrying about winning the pricing-power game (important though that is) with rivals such as PepsiCo
But I mentioned something that turned out to be completely wrong. I said that Coca-Cola stock was headed markedly lower. To quote my own words:
I believe Coca-Cola stock will suffer the same fate as Microsoft
(NASDAQ:MSFT)stock: The shares are most likely headed below 30 unless a miracle occurs. In fact, I foresee a time in the next couple years when KO might actually be stuck in a range between 25 and 28... something Mr. Softy is all too familiar with. Both were mighty growth stocks at one point that have hit a wall.
Although I did imply that it wasn't going to happen right away, let's face it: I was essentially suggesting that Coke would be below $30 a share within a very short period of time. That was the tone of the statement, and the tone of the piece. Let me say it again: I was wrong. No question.
You can't fool the Fool Community
I'll tell you something: The Fool Community is smart. You can find all kinds of great ideas and useful advice on the various discussion boards dedicated not only to stocks but also to all kinds of investments, hobbies, cultural events, and so forth.
A while ago, I happened to come across a post that reminded me of my frustrated Coke article. One of our sharp members, DanQuisenberry, posted a criticism of my article on the Berkshire Hathaway
To begin with, it must be understood that I've lived with Coca-Cola stock for a long time. It was one of my first investments. And, as stated, I bought at the top. Take a look at this 10-year chart, and please begin at the middle of 1998. Quite honestly, I see a long-term trend. I've seen many instances where someone said, "Hey, the stock is a buy right here." I've seen many instances where that same someone was proved wrong. I see weakness relative to the S&P 500. Most of all, however, I look at my own investment and see that, even with reinvested dividends and additional buys, I have not yet broken even. The comparison with Microsoft was simply meant as an illustrative analogy: Both were once-mighty stocks that fell from grace and are now trading in a tight range. (I can tell you from firsthand experience how Microsoft fell from grace, because I lost money on it.)
I guess that was my mistake -- I was thinking too technically. I was caught up in a chart pattern. When the latest negative catalyst came last September, I said to myself, "That's it! This Dog of the Dow has got to rid itself of all the weak holders on a high-volume blowout day if it's ever going to resume an uptrend!" I wanted downtrend lines broken, moving averages moved away from, accumulation to usurp distribution -- I was acting like that Capitalist Pig on the Fox News Channel, Jonathan Hoenig, hoping for some momentum.
I'm not about to say that the science of charting isn't useful. It is. But not in Coca-Cola's case. There's something a bit more important with a company like this.
The valuation algorithm vs. the emotional chartist algorithm
Maybe if I'd done a bit of a valuation analysis, I might have seen that my premature ranting was exactly that -- premature.
Just because a stock is in a downward spiral, that doesn't mean it will be that way forever. Now, I'm not about to suggest that the efficient markets theory is totally bogus; the Fool has had a storied history arguing against it, and many aspects of its counterpoint hold true. But the stock chart of Coca-Cola properly reflected decreasing prospects for growth in case volume. It wasn't a matter of the shorts being wrong and/or irrational.
Nevertheless, at some point you have to step back and see whether a beaten-down company is potentially on the verge of a turnaround. You have to look at things like a discounted cash flow analysis, the PEG ratio, generation of free cash, returns on equity and investment, cash on the balance sheet, debt levels, dividend growth, etc. Just looking at a chart and declaring, "OK, this goes to $25 in the next week and a half," is rash and inadvisable (more importantly, it can lose you cash -- and cash is king, baby).
I still hold Coca-Cola and will continue to do so; as I've said before, I like the dividend growth and am willing to wait out the capital loss. The stock is currently more than $40 a stub, and Philip Durell -- who as analyst for the Motley Fool Inside Value newsletter is an authority on finding value in the market by means of a rigid valuation algorithm -- believed it worthy enough to recommend to his newsletter subscribers. As I've shown today, I missed the call on this one. That's OK, though; we all have to make bad calls from time to time if we are to learn from them. Waiting for a stock to reach its true value can be a challenging test to one's patience -- but make no mistake, the reward is worth the tribulation.
Coca-Cola was a January Motley Fool Inside Value recommendation. Want to see what other value plays Philip Durell has on deck? Click here for a risk-free 30-day trial to Inside Value. Or, for a limited time,take advantage of a25% discountto our regular price.
Fool contributor Steven Mallas owns shares of Coca-Cola. If you want to share your opinion of the soft drink, chime in on the Coca-Cola discussion board . The Motley Fool is investors writing for investors .