Coca Cola (KO): Expect mutual fund ownership to continue to shrink

By Timothy Lutts, Chief Investment Strategist and Editor of Cabot Stock of the Month

From Cabot Wealth Advisory, 10/26/09  Sign up for free Cabot Wealth Advisory e-newsletter

Today, I have two main thoughts on the market.

The first is that the bull market is healthy as a horse, and it will remain healthy until enough people stop arguing with it, questioning it and simply denying it.

The second is that market leadership is probably beginning to narrow, as the identity of the greatest growth stories becomes clearer.

Last Friday, for example, brought an awesome 23% jump in Amazon.com (AMZN), the result of a crackerjack earnings report. In short, Amazon.com is selling an enormous (but secret) number of Kindle e-book readers, and they’re very profitable.


What gets my attention is this number, $11 billion. That’s the amount of value that Amazon.com’s stock gained in the market on Friday, thanks to the buying of major investors.  At the market close on Thursday, AMZN was judged to be worth $40 billion. Twenty-four hours later, the market said it was worth $51 billion!

This big number tells me that some very serious investors, are projecting some terrific earnings power for Amazon.com, through both its main retail operation and its proprietary Kindle unit. Both are revolutionary. The Amazon.com Web site has already changed the world and is still increasing in its influence. And the era of the Kindle is just beginning. With newspapers and magazines shrinking and dying, Amazon.com has an enormous opportunity to become a preferred information/entertainment medium.

Other new leading stocks, all of which have been written about in Cabot Wealth Advisory before, include Apple (AAPL), Maxwell Technologies (MXWL), Netflix (NFLX) and Rackspace (RAX) … and I could write about any of them again, but I don’t want to bore you. If any of them are unfamiliar, click on Featured Stocks.

Today, I can’t resist noting that an event I’ve been waiting for finally occurred last week; Coca-Cola (KO) broke down. It happened on Tuesday, after the company released an earnings report that revealed the fourth consecutive quarter of no growth from the previous year. Trading volume on the breakdown was only slightly elevated, so this was not a major technical signal … but it’s a start.  

And I think there will be more breakdowns in the future, as the realization slowly dawns that in the new world, where the fight against obesity is taken increasingly seriously, Coca-Cola’s products, full of empty calories, are the enemy.

And here’s the thing. Coca-Cola is an icon. It’s a universally known, well-respected institution. To most people, that means it’s something to be respected. To me, that means it’s something to be questioned, because I know that when every last buyer of a stock has bought, and public perception reaches a peak, there remains only one direction for a stock to go, and that’s down. In the future as I see it, doubt slowly creeps into investors’ perceptions about Coca-Cola, and they begin to sell some of their stock and move into other, more attractive alternatives.

It starts as a trickle, but it ends as a deluge.

So consider this. Less than a year ago, KO was owned by 648 mutual funds. At the end of June, the number was down to 622, and I expect it to keep on shrinking in the quarters ahead. Meanwhile, Amazon.com, which is changing the world in a good way, has yet to see its mutual fund ownership cross the 600 level; it was at 512 at the end of June (its highest level ever). And little Netflix, also a great growth story today, had just 213 mutual fund owners at the end of June.  

If you want to make money, I suggest you be aware of these trends. Get out of KO and get into growth stocks like AMZN and NFLX.



Tim LuttsTimothy Lutts

President, Chief Investment Strategist, Editor of Cabot Stock of the Month

Timothy Lutts heads one of America’s most respected independent investment advisory services, publishing eight newsletters to more than 165,000 subscribers around the world. Tim leads a dedicated team of professionals who serve individual investors with high-quality investment advice based on time-tested Cabot systems. Under his leadership, Cabot has been honored numerous times by both Timer Digest and the Hulbert Financial Digest as among the top investment newsletters in the industry. Tim also edits Cabot Stock of the Month.