The Coca-Cola Company (US:KO) is an example of what can be achieved through the power of marketing. Coca-Cola has made its way into almost every country on the planet, apart from Cuba and North Korea (although one may assume it is likely to be served in clandestine bars); a beverage behemoth that from humble roots has conquered the globe.
It wasn’t always so easy for Coca-Cola. The original founder, John Pemberton, an American Civil War veteran and morphine addict, was convinced that the cure lay in coca wines, and eventually Coca-Cola was born.
Pemberton ended up selling the rights to his business several times over, and eventually one Asa Candler ended up with the trademark ownership of Coca-Cola. Within three years of taking this ownership in 1892, Coca-Cola was sold in every state.
Coca-Cola is represented on the London market in the form of Coca-Cola HBC AG (CCH) – a bottling company, independent of the former. How did that happen? Well, it all came about when Benjamin Thomas, Joseph Whitehead and John Lupton approached Mr Candler and asked to buy the bottling rights for Coca-Cola. Asa Candler did not see the future in bottling, and so the bottling rights were sold for a measly $1. This contract is heralded by the company nowadays as a positive, such is the religious fervour of the brand. When I visited Coca-Cola World in Atlanta, a tour guide romanticised the contract as a stroke of genius. I helpfully pointed out that the decision to sell the bottling rights has cost – and continues to cost – shareholders billions of dollars as The Coca-Cola Company has never managed to gain control over the independent bottling companies since. He didn’t agree.
Coca-Cola Hellenic Bottling Company (HBC) is the result of this contract, and the company listed on the London Stock Exchange in April 2013.
Looking at Chart 1, we can see that the stock took several years to get going for shareholders, and once it broke out of the all-time high it went on a clear trend without pausing for breath. This is the attraction of all-time high breakouts – once the entire shareholder register is in profit, there is nobody waiting to sell in a hurry. This means that stocks can continue to rise without the ‘break-even traders’ – investors who wish they had never bought and are waiting for their break-even price to sell and unload their position into the market. The path of least resistance is often the best one to take as a trader.
Looking at Chart 2, we can see a familiar pattern: a stock price in freefall over the course of several weeks, and buyers stepping in to support the stock at a price that investors can have confidence in. That shows up in the volume in the middle of March, where we see two large volume days on the bounce.
If you were brave enough to be buying at peak fear, when the shares were trading at 1,400p, you would have received a return of over 50 per cent on your outlaid capital in just six weeks, in a company that bottles for one of the most well-known businesses on the planet. Everybody likes the idea of being greedy when others are fearful, but 1) it’s easy to say, and much harder to do, and 2) it is difficult to stomach such volatility when one is not used to it.
Taking large positions in a bet against the entire market, and then actually holding onto them when there is nothing but bad news being pumped all day and night through the talking heads on the television, is an extremely tough thing to do.
Naturally, it’s easy in hindsight. If only I’d held on to my William Hill (WMH) shares at 30p – they would be worth over 130p now, a handsome gain of three bags for anyone who did exactly that. Risk management is a core focus of being a trader, and watching a large gain on paper erode in the hope of it then surpassing the previous high is not something that fits in my trading strategy.
What I do like to do is buy similar chart patterns so that, if I position size sensibly and effectively, I can hope to generate an edge over the long term. If we play familiar charts repeatedly, we don’t have to be right very often with sensible risk/reward ratios. In fact, we can risk one to make two and be wrong 40 per cent of the time, and yet still make money. Chart 2 is one of those charts I like to play. We can see a scruffy cup-and-handle pattern emerging, and should the stock price break through this resistance level then it’s a stock I’d want to get on board on.
Two areas of potential resistance lie not far up from these levels, however. Often the tops and bottoms of gaps present themselves as resistance zones. The potential runway for a trend is not huge before we hit this, and so it may make sense to scale down the position or decrease potential risk as there may be decreased potential reward on the table. By thinking in terms of what can happen to our trade before we place the trade, we ensure that we are consistently taking care of our capital and not foolishly squandering it on sub-optimal opportunities.
You can contact Michael and get your free copy of Ten Habits of Highly Profitable Traders from www.shiftingshares.com
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