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3 Things Under the Radar This Week

Investing.com - Here’s three things that flew under the radar this week.

1. Coke Is Goldilocks

Coca-Cola (NYSE:KO) enjoyed one of its best weeks in a long time, rising more than 5.5%, tops among the 30 Dow stocks.

It hit a new high on Wednesday and is up 14.6% for the year.

Coca-Cola (NYSE:KO) enjoyed one of its best weeks in a long time, rising more than 5.5%, tops among the 30 Dow stocks.

Sure, the year-to-date return pales compared with Dow-leading Microsoft's (NASDAQ:MSFT) 39% gain this year.

But Coca-Cola's return is deceiving, because it includes the drubbing the beverage giant suffered in mid-February after its fourth-quarter earnings report disappointed Wall Street and knocked the shares down about 10%, before bottoming on Feb. 19.

Since then, Coca-Cola is up 21%.

So, what happened? Original Coke products did well. So did Coke Zero Sugar, which has been growing a double-digit levels. In the beverage business, that's a big deal.

Second-quarter revenue grew 6% to $10 billion. Earnings per share jumped 13%. The company now expects full-year organic growth (reported growth less the effects of acquisitions and currency changes) to hit 5%. In February, the company was thinking 4% growth.

But Coke's stock price may be vulnerable because it's hit a string of new highs recently. The shares are trading at 33x trailing earnings, a rich premium. Its relative strength index has topped 70 - a key technical level to judge overvaluation - several times in the last week.

But the dividend investor should like Coke. Its $1.20-a-share payout is stable and represents a yield of about 3%.

And Coke is a value play, never too hot and not too cold. The stock fell slightly in last year's fourth quarter, while the market overall was pummeled.

2. More Pain Ahead for European Banks?

European Central Bank President Mario Draghi signaled a stimulus package was in the pipeline for September, sending Germany’s government bond yields to a record low.

Germany’s 10 year government bond yield hit a new all-time low of 0.422% on Thursday intraday, before paring some losses.

Analysts have previously warned that every 25 basis points additional of a rate cut may prove a drag of about 2% on earnings per share of banks.

“Low rates have hurt bank profitability in most developed markets for years now, and the pain doesn’t seem to be coming to an end any time soon,” said Jan Schildbach, head of research for banking and financial markets at Deutsche Bank AG (DE:DBKGn) in Frankfurt.

Earnings from both UBS and Deutsche Bank this week gave traders an insight into the damage that negative rates may bring.

Deutsche warned that it expects European short-term rates will rise to just 0% (you read that right) in 2021.

"The bottom line for the banks in Europe is that low rates are a problem as they can't grow net interest income," said PM Capital's chief investment officer Paul Moore. "They typically have cost inflation as they tend to be labor intensive banks and if you can't grow net interest income, it's hard to grow profits."

The iShares STOXX Europe 600 (DE:STOXXIEX) ended the week down, adding to losses of more than 9% for the quarter.

With earnings from BNP Paribas (PA:BNPP) Societe Generale (PA:SOGN) and Natixis (OTC:NTXFY) on the deck for next week, investors may have to brace for further gloom out from the region’s main banks.

3. Is Snap in a Netflix Trap?

Social media company Snap (NYSE:SNAP) reported earnings this week, with the investors applauding the results and shares jumping.

The company that runs Snapchat beat on the top and bottom lines and also on one of the key social media metrics, with daily active users rising to 203 million.

Once the black sheep of the social media crowd, derided by investors and Kylie Jenner alike, the company’s stock is now near a 52-week high.

Snap stressed that original content was not only a driver of results, but something it plans to focus on in the future.

The concentration is on Discover, an aspect of an app that is solely friend-to-friend which “is all about keeping (users) up-to-date on current events, pop culture”.

But that concentration could put Snap in the same quandary as Netflix (NASDAQ:NFLX).

The total daily time spent by Snapchat users watching Discover rose 60% from the year-ago period – clearly a big deal to the company’s growth strategy.

“We continue to invest in our Discover platform, with a particular focus on building a sustainable premium content ecosystem,” Snap said

That means a big continued investment in original content.

But just like Netflix, Snap is facing competitors with very big pockets like Facebook (NASDAQ:FB), Alphabet (NASDAQ:GOOGL) and Twitter (NYSE:TWTR).


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