The Crowd Is Selling Coca-Cola. Here's Why I'd Be Buying the Dip.
Coca-Cola stock has dropped about 5% over the past week.
By Dave Kovaleski
Over the past week or so, a significant number of investors have been selling off shares of Coca-Cola (KO 0.68%). On June 10, Coca-Cola shares were trading at $83.59 per share, but since then, the stock price has fallen about 5% to around $79.29 per share.
It is a bit of a head scratcher because there really has been no direct action or company catalyst that led to the sell-off. In fact, the stock has performed well year to date, up about 13% even after the sell-off.
Two factors likely contributed to Coca-Cola's stock price dropping.
One, Coca-Cola hit a 52-week and all-time high on June 10, closing at $83.59. The P/E ratio had risen to around 25, with the forward P/E at 24. That's not high for tech and growth stocks and is below average for the S&P 500, but for a consumer staple like Coca-Cola, it's viewed as being on the high side. The forward P/E is as high as it's been in more than a year.
Two, investors were likely rotating back out of more stable consumer staples like Coca-Cola and back into tech stocks as part of a risk-on cycle. The shift to tech and growth stocks follows excitement around the recent Space Exploration Technologies IPO, anticipation for upcoming OpenAI and Anthropic IPOs driving more interest in AI, easing of global tensions between the U.S. and Iran, and investors buying back in following a steep tech sell-off the previous week on fears of high valuations.
Coca-Cola hits the spot
The renewed excitement around SpaceX, future AI IPOs, and lower market valuations are all somewhat speculative catalysts. While the OpenAI and Anthropic IPOs will certainly lead to increased demand for AI infrastructure stocks like Nvidia, Micron Technology, and Broadcom, investors need to realize that valuations remain ridiculously high, despite the brief pullback.
The cyclically adjusted P/E ratio, or Shiller ratio, is still at a historically high level of 41, the highest since the dot-com boom in 1999. Even with catalysts like the IPOs and easing of hostilities, that valuation is unsustainable.
So, should we believe the hype? Probably not. That's not to say you should sell off your tech stocks en masse, because many are reasonably valued, like Nvidia and Micron. But it does mean you should be aware of the valuation risks and maintain a healthy allocation to consumer staples and high-yield dividend stocks in your portfolio, like Coca-Cola.
While its valuation ticked up a bit, Coca-Cola is still reasonably valued and is one of the best dividend stocks you can buy, with a yield of 2.65% and a track record of raising its dividend annually for 63 straight years.
Some 88% of analysts rate Coca-Cola stock as a buy with a median price target of $88 per share, which suggests an 11% return. But that return will be even higher with the dividend reinvested. Given the state of the market, it is not time to go risk-off, and it's not time to dump Coca-Cola shares.