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This Dow laggard could be next year’s winner

Talking Numbers

Is one of the worst performing Dow stocks a good investment?

It's one of the worst performing stocks in the Dow Jones Industrial Average. But, could Coca-Cola be a relative bargain?

The Dow Jones Industrial Average is having a very good year. So far, it's up nearly 19% year-to-date. As with all averages, some companies will outperform while others will underperform. But, what if one of those underperforming stocks isn't so bad to own?

(Read: US stocks finish mostly lower; S&P 500 not far from record high)

One of the most famous – and simple – trading strategies out there is the "Small Dogs of the Dow", a take on the "Dogs of the Dow". The Small Dogs of the Dow strategy has investors buying the year's bottom five performers of the Dow. Right now, those stocks are McDonald's, Coca-Cola, Exxon Mobil, Caterpillar, and IBM. The last two are actually down for the year.

John Stephenson, portfolio manager at First Asset Investment Management, thinks that of all the Dow's small dogs, Coca-Cola is good stock to own. While Coke's shares have fallen 7% in the last six months, it spent the first part of the year tracking the index. For all of 2013, Coke's shares are up by less than 9%.

This week, the company will take advantage of relatively low interest rates with the largest corporate bond sale in history. The $4.5 billion offering will pay rates only a little above LIBOR given the company's excellent credit ratings. Last year, the company bought one-ninth of its shares in one of the biggest share buybacks ever when it purchased 500 million shares for $18.92 billion.

(Read: Coca-Cola announces five-part benchmark bond)

To be sure, Coca-Cola has a tough road ahead, in part because of its signature product. When Steve Jobs tried to convince John Scully, the president of rival Pepsi, to join the team at Apple in the 1980s, the tech pioneer asked him "Do you want to sell sugared water for the rest of your life?" Now it seems even the appeal of sugared water is waning as plain bottled water grows in popularity. By the end of the decade, bottled water sales is expected to overtake carbonated drinks.

But Coca-Cola, of course, doesn't just sell Coca-Cola. It sells treated tap water under the label Dasani and shares a quarter of that market with Pepsi's Aquafina. And, it owns about 500 other brands, from Aquapure filters to Zico coconut water.

Stephenson says he likes Coca-Cola as an investment. "There are some identifiable catalysts in the future," says Stephenson. "Margins are improving, China has been very strong; sales are up 9% in China. So, the most important emerging market is doing really well. And, they're looking at refranchising their bottling operations which will really drop money to the bottom line, particular in the US. So, I think this argues for a very strong story."

However, Talking Numbers contributor Richard Ross, Global Technical Strategist at Auerbach Grayson, sees Coca-Cola's stock coming up to a key resistance level.

Is Coca-Cola a good buy at these levels? Watch the video above to see what Stephenson on the fundamentals and Ross on the technicals have to say about this stock.

[Disclosures: First Asset Investment Management holds shares of Coca-Cola.]

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