The Chart du Jour

Buy Schweppes Against Short Coke

March 1, 2001

By, Barclay T. Leib

As many of our readers know, we primarily make our living here at Sand Spring Advisors managing a "fund of funds" that allocates to hedge fund and commodity managers. Many of these managers run long-short portfolios, seeking out under-valued securities in a given industry versus selling over-valued ones. Their goal is to create positive returns without absolute exposure to an equity market decline.

It was only this evening however that we realized that in our own recommendations here at, we have implicitly recommended a paired long-short trade ourselves, never quite linking them together. We have previously recommended selling Coca-Cola and since that time the stock has plunged over 15%. We have also previously recommended buying Cadburry-Schweppes, and that stock has held firm even as the broader market has been under stress. Coke trades at 59 times earnings, and has a horrible looking technical chart pattern. Cadburry-Schweppes trades at a more modest 19.5 times earnings, and has a constructive looking chart pattern that could easily lead to new highs. Cadburry-Schweppes also now controls a wide variety of brand beverage names including 7-Up, Dr. Pepper, and now Snapple, and is achieving cost-savings in its distribution network. Earnings have been steadily growing and free cash flow ballooning.

Maybe we will get our interpretation of one of these stocks wrong, but as a paired trade, and as the market as a whole slowly gropes for a trading bottom, we think short KO and long CSG holds continued great appeal.

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