How a Can of Coke Led Me to a New Profit Opportunity
How a Can of Coke Led Me to a New Profit Opportunity
If the Federal Reserve can fight inflation by raising interest rates, that 12-pack of soda you're now paying $7 for should drop back to $4 as prices for the raw materials to make those cans get cheaper. I emphasized “should” for a reason, which I'll explain in just a minute.
When you buy a Coke, you're getting it in an aluminum can (ignore plastic for now).
Think about the components that go into it:
Sweetener, largely from corn, for the beverage itself
Aluminum for the can
As a commodity, aluminum is priced on the open exchange.
This chart shows the price of aluminum climbing from below $1 per pound in 2020 to almost $2 per pound by early 2022.
Source: Kitco.com
Along with most other input costs, aluminum prices forced Coca-Cola (KO) to raise prices for consumers.
Looking ahead, we know that the Federal Reserve and other central banks plan on raising rates until inflation comes under control.
Historically, this leads to a recession, where demand falls below supply.
That lowers the prices of commodities.
Here's where things get interesting.
Let's say aluminum prices decline and it's less expensive for Coca-Cola to make a can of soda.
Coca-Cola could lower its prices, passing the cut in aluminum costs on to consumers like it passed the increase in aluminum prices, but is there an incentive to do so?
Think about it. Most people don't change their soda-drinking habits based on the price of Coke or Pepsi. This makes demand relatively elastic, meaning it doesn't change with the price.
So while companies like Alcoa Corp. (AA) and other commodity producers see their profits decline, I expect margins to actually increase for some consumer goods and consumer discretionary companies — such as Coca-Cola, PepsiCo (PEP), Home Depot (HD), and Kraft Heinz (KHC) — because there isn't an incentive to lower prices.
If the majority of people are now accustomed to paying $6 to $7 for a 12-pack of soda and are willing to do so, why would Coca-Cola ask for less money?
Timing the Trade
In order to pull off a successful trade based on this thesis, we need to have a few things happen.
First, the economy needs to go into a recession.
TradeSmith Finance can help us identify when this has happened through our market health indicators on broad market indexes such as the S&P 500 and Nasdaq 100.
Right now, the Russell 2000 and the Nasdaq 100 are both in the Red Zone. It may not be long before the S&P 500 joins them.
Second, the price of commodities needs to decline. You can look at the price of crude oil, or the price of ETFs such as XLE for the energy sector, XOP for oil and gas drilling, or DBA for agriculture.
Declines in the beneficiaries of oil and other commodities should precipitate a drop in input costs.
Third, and most importantly, we need to set up a watchlist of stocks like Coca-Cola where lower commodity costs pad the bottom line and demand is relatively elastic.
You can think about basic consumer goods and food products. I'd list finished construction product companies as well. Even if housing demand declines, which it will, we still have an enormous backlog of commercial and public works projects left to fill.
My name is Keith Kaplan. Since 2004, I've been building sophisticated computer software with a single goal in mind: make money.
But after years of helping my Fortune 500 clients get rich, I was burnt out. So I quit, and applied my engineering skills to a specific corner of the stock market… where you could potentially generate instant cash every time you trade.
I filmed a short video "demo" for folks who are interested in learning how this trade works.
And because of implied volatility, options are a great way to act on this investing idea.
For those who aren't familiar with the concept, implied volatility measures the demand for options.
As stocks decline, especially during broad market sell-offs, implied volatility increases. The higher the implied volatility, the higher the price of the option.
Strategies like cash-secured puts and put credit spreads are great ways to take advantage of the higher-than-usual option prices. Plus, when implied volatility declines, it benefits your positions.
We also want to make sure to use timing indicators to help us pick the most advantageous moments to enter trades and reduce our downside risk. That's where a combination of our TradeSmith Finance chart analysis tools and options trading strategies can create powerful trades.
I want to know what you think about my thesis. Email me and let me know how you expect inflation to play out for companies like Coca-Cola and Home Depot.
While I can't respond to everyone individually, I promise to read every email.
Enjoy your Wednesday,
Keith Kaplan CEO, TradeSmith
P.S. Never worry about inflation again: There's a way for you to pull instant cash out of three stocks and put up to $2,880 “on loop” in your account… every month.
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The chart below represents the best-performing open positions over the last two years, as recommended by our software.
TradeSmith is not registered as an investment adviser and operates under the publishers' exemption of the Investment Advisers Act of 1940. The investments and strategies discussed in TradeSmith's content do not constitute personalized investment advice. Any trading or investment decisions you take are in reliance on your own analysis and judgment and not in reliance on TradeSmith. There are risks inherent in investing and past investment performance is not indicative of future results.
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