Hedge Fund Sentiment Unshaken by Sugar Taxes on Soda

Big soda will soon be taxed more and more. In April, the British government levied a new tax to be enacted in April 2018 of around $0.25 to $0.34 per liter of sugary drinks in its attempt to lower childhood obesity. The tax will affect many of the sodas made by the world’s leading carbonated beverage companies. In May, news broke that the city of Philadelphia is considering enacting a tax that could raise the price of soda by around half to pay for prekindergarten and other services. So far, the act hasn’t passed yet and many industry participants are spending millions to fight the measure.

Although the news for big soda seems to be bad, many hedge funds are still bullish on the sector. In this article, we analyze the smart money’s favorite names in the sector, including PepsiCo, Inc. (NYSE:PEP), The Coca-Cola Co (NYSE:KO), Dr Pepper Snapple Group Inc. (NYSE:DPS), Monster Beverage Corporation (NASDAQ:MNST), and Coca-Cola Enterprises Inc (NYSE:CCE).

Through extensive research, we determined that imitating some of the picks of hedge funds and other institutional investors can help generate market-beating returns over the long run. The key is to focus on the small-cap picks of these investors, since they are usually less followed by the broader market and are less price-efficient. Our backtests that covered the period between 1999 and 2012, showed that following the 15 most popular small-caps among hedge funds can help a retail investor beat the market by an average of 95 basis points per month (see the details here).

#5 Coca-Cola Enterprises Inc (NYSE:CCE)

– Number of Hedge Fund Holders (as of March 31): 30
– Total Value of Hedge Fund Holdings (as of March 31): $840.18 million
– Hedge Fund Holdings as Percent of Float (as of March 31): 7.30%

With 30 top funds from our database holding shares at the end of March, Coca-Cola Enterprises Inc (NYSE:CCE) is the fifth most widely held soda stock among elite hedge funds. Given that Coca-Cola Enterprises has beaten analyst earnings estimates for five straight quarters, perhaps it isn’t that surprising that hedge funds still like the stock. Management has performed very well despite the currency headwinds and the company’s dividend is safe given the company’s 2016 anticipated free cash flow of $500-$550 million after the CCEP transaction cash cost of $75-$100 million.

#4 Monster Beverage Corporation (NASDAQ:MNST)

– Number of Hedge Fund Holders (as of March 31): 31
– Total Value of Hedge Fund Holdings (as of March 31): $1.02 billion
– Hedge Fund Holdings as Percent of Float (as of March 31): 3.80%

Monster Beverage Corporation (NASDAQ:MNST) reported monster-sized earnings for its first quarter, with EPS of $0.80 on revenue of $680.18 million, beating the consensus estimates by $0.06 per share and $23.37 million, respectively. Revenue jumped 15.9% year-over-year as consumers continue to snap up the company’s energy drinks. The company also announced its intention to commence a tender offer to repurchase up to $2 billion of its common stock. Given the strong demand, analysts are expecting more growth ahead, with an estimated annual next five-year EPS growth rate of 20.9%. Monster’s expected growth rate is easily one of the best in the industry and potentially makes the stock a savvy bet even given its forward P/E of 31.4.

#3 Dr Pepper Snapple Group Inc. (NYSE:DPS)
– Number of Hedge Fund Holders (as of March 31): 32
– Total Value of Hedge Fund Holdings (as of March 31): $1.94 billion
– Hedge Fund Holdings as Percent of Float (as of March 31): 11.60%

Although it isn’t as big as Coca-Cola or PepsiCo, Dr Pepper Snapple Group Inc. (NYSE:DPS) is still loved by the hedge fund crowd. A total of 32 elite funds held shares of the company at the end of March, unchanged from the previous quarter. Although shares of the company are roughly flat year-to-date, they are still near all-time highs and sport an attractive 2.3% dividend yield. Dr Pepper napple also reported solid earnings for its first quarter, beating both top and bottom line expectations. For 2016, the company expects core EPS at the high end of the previously communicated range of $4.20 to $4.30. Cliff Asness’ AQR Capital Management owned more than 2.5 million shares of Dr Pepper Snapple Group at the end of March.

#2 The Coca-Cola Co (NYSE:KO)
– Number of Hedge Fund Holders (as of March 31): 62
– Total Value of Hedge Fund Holdings (as of March 31): $22.81 billion
– Hedge Fund Holdings as Percent of Float (as of March 31): 11.40%

Although Coke might be detrimental if consumed in excess, Warren Buffett is still committed to drinking several cans of soda a day. Buffett’s habit is not only good news for Coca Cola’s overall demand, but also it is good for the stock’s sentiment. Having the world’s greatest investor’s fund own 400 million shares at the end of March goes a long way in the investing world, and is one of the reasons why The Coca-Cola Co (NYSE:KO) trades at an above-average 21 times forward earnings estimates. Also aiding the bullish cause for Coca-Cola is the company’s safe dividend of $1.40 a year, which represents a 3.18% dividend yield.

#1 PepsiCo, Inc. (NYSE:PEP)

– Number of Hedge Fund Holders (as of March 31): 65
– Total Value of Hedge Fund Holdings (as of March 31): $6 billion
– Hedge Fund Holdings as Percent of Float (as of March 31): 4.00%

A total of 65 funds out of those tracked by Insider Monkey held shares of PepsiCo, Inc. (NYSE:PEP) at the end of March, making the stock the most widely held big soda stock in the hedge fund universe. With its extensive snack brand portfolio, PepsiCo is more diversified than Coca-Cola and the company won’t suffer as much if more governments around the world pass sugar-taxes. PepsiCo is also slightly cheaper valuation-wise than its larger competitor, with PepsiCo sporting a forward P/E of 19.6 versus Coca-Cola’s 21. Analysts have a pretty bullish opinion on the stock, with a price target of $111.8 per share, giving PepsiCo more than 10% upside from current levels.

Disclosure: none