Hedge Funds Like Pepsi More than Coke and Other Soda Rivals

Given that drinking soda can be as strong a habit for some people as smoking cigarettes, demand for soda companies doesn’t change very much during bad-times. The stability of demand affords many soda companies with stable and predictable earnings, two characteristics highly prized in the investment community. On the account of those facts, Insider Monkey has put together a list of the smart money’s favorite soda stocks as of the end of the second quarter, based on their popularity among some 750 funds we track at Insider Monkey.

Let’s dive in, and analyze hedge funds’ top soft drink picks, which include PepsiCo, Inc. (NYSE:PEP), The Coca-Cola Co (NYSE:KO), Coca-Cola European Partners plc Ordinary Shares (NYSE:CCE), Dr Pepper Snapple Group Inc. (NYSE:DPS), and Monster Beverage Corporation (NASDAQ:MNST).

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).

#4 Dr Pepper Snapple Group Inc. (NYSE:DPS)

– Number of Hedge Fund Holders (as of June 30): 34
– Total Value of Hedge Fund Holdings (as of June 30): $2.08 billion
– Hedge Fund Holdings as Percent of Float (as of June 30): 11.60%

Although it isn’t as large as The Coca Cola Company or PepsiCo (and thus doesn’t realize as much economies of scale), Dr Pepper Snapple Group Inc. (NYSE:DPS) can nevertheless hold its own. For its second quarter, Dr Pepper Snapple reported EPS of $1.25 on revenue of $1.7 billion, beating the average estimates by $0.05 and $20 million, respectively. Non-carbonated beverage volume rose by 2%, while carbonated volume inched up by 1%. Dr Pepper expects full-year earnings of $4.27 to $4.35 per share, giving the stock a reasonable forward P/E of around 20. Of the around 750 funds that Insider Monkey tracks, 34 had a bullish position in Dr Pepper Snapple Group Inc. (NYSE:DPS) heading into the third quarter.

#3 Coca-Cola European Partners plc Ordinary Shares (NYSE:CCE)

– Number of Hedge Fund Holders (as of June 30): 40
– Total Value of Hedge Fund Holdings (as of June 30): $1.55 billion
– Hedge Fund Holdings as Percent of Float (as of June 30): 19.00%

Coca-Cola European Partners plc Ordinary Shares (NYSE:CCE)’s business is pretty stable. Because it is the sole licensed bottler for products of The Coca-Cola Company in many Western European countries, and demand for The Coca-Cola Company’s products doesn’t change very much, Coca-Cola European Partners’ income stream is resilient, which makes the company’s annual dividend of $1.20 per share (which translates into a 2.97% dividend yield) attractive to many investors, which include 40 funds from our database as of the end of June, up by 10 from the previous quarter. As a bonus, shares also trade for only 16.29 times forward earnings.

#2 The Coca-Cola Co (NYSE:KO)

– Number of Hedge Fund Holders (as of June 30): 55
– Total Value of Hedge Fund Holdings (as of June 30): $21.19 billion
– Hedge Fund Holdings as Percent of Float (as of June 30): 10.80%

The Coca-Cola Co (NYSE:KO) is a dividend aristocrat, having increased its dividend payout every year for 53 straight years. Coca-Cola has been able to raise its dividend so consistently due to its strong brand, the relatively in-elasticity of its products, and the company’s economies of scale. In recent years, Coca-Cola has taken steps to diversify itself and move beyond soft drinks as the source of its income. The company has tried to increase its market share in other faster growing beverage segments such as bottled water, energy drinks, juice, etc. in recent years. As Coca-Cola becomes even more diversified and as management works to cut costs further, the company’s dividend of $1.40 a year (3.31% yield at current prices) becomes even more secure. A total of 55 funds owned shares of The Coca-Cola Co (NYSE:KO) at the end of the second quarter, down by seven funds from the previous quarter.

#1 PepsiCo, Inc. (NYSE:PEP)

– Number of Hedge Fund Holders (as of June 30): 58
– Total Value of Hedge Fund Holdings (as of June 30): $5.36 billion
– Hedge Fund Holdings as Percent of Float (as of June 30): 3.50%

With 58 funds from our database holding PepsiCo, Inc. (NYSE:PEP) in their portfolios at the end of June, PepsiCo is more popular than The Coca-Cola. Given PepsiCo’s diversification and management’s strong execution, perhaps it isn’t that surprising. On the account of its eight snack brands that generate over $1 billion in annual sales, PepsiCo isn’t as dependent on the soft drink market (which may or may not be in secular decline) as Coca-Cola. With a great quarterly earnings report, PepsiCo’s management has also recently executed better than Coca-Cola. Analysts have an average price target of $115.93 per share on the stock.

Disclosure: none