More than 45 years ago, writer and philosopher Ayn Rand said, "All tyrannies have originated, not for an evil, but for an altruistic purpose -- the desire 'to do something' with mankind." Last week, New York City Mayor Michael Bloomberg used similar words, and made national headlines, in proposing a ban on large servings of soda and other sugary drinks in the Big Apple. "We've got to do something," he said.
Apart from the obvious infringement on rights of citizens to freely sell and consume soda pop, Bloomberg's ban is unlikely to have any impact on the waistlines of New Yorkers or on the beverage companies that manufacture these drinks. Even without the aid of a nanny state government, the number of calories Americans have been consumed through carbonated beverages has dropped 20% over the past decade, according to industry trade magazine Beverage Digest.
Investors shouldn't worry about the Mayor's proposal denting soda stocks, most of which have powered higher in recent months despite a weak market for risk and the persistent threat of even greater government regulation.
In fact, it seems the more sugary the soda, the higher the stock has risen.
For example, Monster Beverage's (MSTR)
Yet sales have been nothing less than toothsome for investors, with the company's net income rising 35% in its last fiscal year, and shares climbing nearly 100% to an all-time-high. Earlier this spring shares leapt after a rumor that Coca-Cola was considering buying the company, which generated even more interest in the stock.
For those thirsty for gains but hesitant to chase Monster's stock, Coca-Cola (KO)
And while Bloomberg might prefer we drink more water, Americans continue to guzzle Coke products on more than a daily basis, downing an average of 399 8-ounce servings of a Coke product each year. The Chinese drink only 32 per year, suggesting there's ample room for international expansion beyond the increasingly sheltered borders of Mayor Mike's Manhattan. At current prices, the stock yields near 2.8%.
Like Monster, the stock is exhibiting signs of technical strength, having hit a new all-time-high this spring even as the U.S. dollar, usually thought to be negatively correlated with large multinationals, strengthened. In response to Bloomberg's proposal, Coke issued a statement, which said "the people of New York City are much smarter than the New York City Health Department believes" and that "they can make their own choices about the beverages they purchase." It's unlikely those who choose Coke are going to change routines as a result of Bloomberg's ban.
Although less followed or widely owned than Coke, Dr. Pepper/Snapple (DPS)
Like other beverage manufactures, the company also produces non-carbonated products, including Mott's Apple Juice, which isn't covered by Bloomberg's proposed ban despite having even more calories per serving than Coca-Cola. The stock appears on the verge of a breakout over $43/share.
Finally, while much smaller and more speculative, microcap soda maker Reeds (REED)
In the mid-1990s, the cigarette industry was coerced into paying states billions of dollars to fund anti-smoking initiatives, as well as eliminating certain marketing campaigns such as Joe Camel. Did tobacco stocks sink? Hardly. They soared.
Turns out that, despite the known risks, some people just want to smoke. It's likely the same scenario will play out with soda stocks, whose products millions of people will continue to enjoy every day, even if Mayor Bloomberg isn't one of them.—Jonathan Hoenig is managing member at Capitalistpig Hedge Fund LLC