Stocks pairs trading: KO vs PEP

NASDAQ:PEP   PepsiCo, Inc.
I'm exploring a pairs trading strategy involving two behemoths in the beverage industry, Coca-Cola (KO) and PepsiCo (PEP). Both companies are well-established and share numerous similarities, yet there are subtle differences that could offer a trading opportunity. The idea is to go long on Coca-Cola and short on PepsiCo, aiming to capitalize on their reversion to a historical relationship.

Why Go Long on Coca-Cola (KO):
Valuation: Coca-Cola has a lower P/E ratio of 24.11, making it less expensive relative to PepsiCo with a P/E of 30.57.

Dividend Yield: Coca-Cola offers a higher dividend yield (3.15%) compared to PepsiCo's 2.87%. Over time, reinvesting these dividends could provide an edge.

RSI Indicator: The RSI for Coca-Cola is 26.68, which falls into the 'oversold' territory, suggesting potential undervaluation.

Liquidity: With a Quick Ratio of 1.00 and a Current Ratio of 1.10, Coca-Cola displays better short-term financial stability.

Why Short PepsiCo (PEP):
Valuation: PepsiCo's higher P/E ratio of 30.57 suggests it is overvalued relative to Coca-Cola.

Recent Performance: While PepsiCo has performed better recently, the pairs trading strategy relies on a reversion to mean, making this an opportunity to short PEP.

RSI Indicator: PepsiCo has an RSI of 39.66, which is neither oversold nor overbought, but higher than Coca-Cola's, implying less likelihood of being undervalued.

Long on 3 KO
Short on 1 PEP

The information and publications are not meant to be, and do not constitute, financial, investment, trading, or other types of advice or recommendations supplied or endorsed by TradingView. Read more in the Terms of Use.