No Coke, Pepsi! My Surprising Top Stock Pick for 2026
Sidle up to the diner counter and order a 4% dividend yield and operating upside at only a 16x forward multiple.
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"Cheeseburger, Cheeseburger! ... No Orange or Coke Today, Four Pepsi"
The Olympia Restaurant: Cheeseburger, Chips and Pepsi - SNL
In the next few weeks investors will be bombarded with analysts' favorite picks for the coming year. No doubt, the list will include a number of spicy and aggressive names in AI and in other areas. You will not find that character in my annual stock pick.
On the surface it might seem absurd to choose PepsiCo (PEP) — a defensive, consumer staples name to be my stock pick for 2026.
However, my choice is, in part, in anticipation of a (potential) negative return for the S&P 500 and Nasdaq indices for the upcoming 12 months — coupled with a possible turnaround in operations at PepsiCo.
My Thesis
Like many consumer nondurable companies, PepsiCo's shares have been a serial underperformer over the last few years for several reasons:
* Defensive stocks have underperformed in an offensively driven investing backdrop in which large-cap technology have represented the market's leadership.
* Food and beverage equities have suffered from reduced snack consumption (GLP-1 and broader health & wellness pressures) and volume trends have been moribund. PepsiCo, in particular, has faced structural challenges in beverages (Mountain Dew and Gatorade brands).
* Expectations are low.
Elliott Investment Management took a $4 billion stake in PepsiCo back in September and outlined a comprehensive 75-page presentation. Elliotts-Perspectives-on-PepsiCo-Presentation.pdf
As seen in their release, the activist firm proposed a series of changes around the company's Frito-Lay North America operations intended to improve the beverage company's competitiveness and financial performance of Pepsi Foods North America. The recommendations included implementing sharper everyday value through price adjustments, elevating innovation and aggressively lowering operating costs.
Elliott creates a sense of urgency for change at PepsiCo.
Three weeks ago PepsiCo management responded to Elliott and announced some initiatives and financial goals aimed at enhancing shareholder value. The 2026 EPS guidance was better than feared and management plans to improve free cash flow conversion and better operating margins were outlined (an improvement of 100 basis points over the next three years).
Here is the company's guidance: PepsiCo Announces Priorities to Enhance Shareholder Value and Provides Preliminary 2026 Financial Outlook
Elliott Management's response to PepsiCo's December 9 plan:
"We appreciate our collaborative engagement with PepsiCo’s management team and the urgency they have demonstrated."
Here is Morgan Stanley's response to the company's December 9 plan:
Initiatives Focused on Value, Innovation, and Costs/Operations - From Morgan Stanley
PEP highlighted PFNA initiatives to sharpen everyday value, elevate innovation, and aggressively reduce operating costs, many of which were already underway since earlier this year. In terms of value, PEP is implementing sharper everyday value through targeted affordable price tiers by brand and channels aimed at stimulating growth and purchase frequency for its mainstream brands. In terms of innovation, PEP reiterated its focus on permissible, as well as functional offerings with no artificial colors/flavors, simpler ingredients, more protein, as well as fiber and whole grains and the restaging of Lay's and Tostitos, and a Doritos Protein launch in 2026. On the cost side, PEP plans to continue to aggressively reduce operating costs and improve operational excellence (PEP has already closed three manufacturing plants and shut several manufacturing lines this year and is in the process of reducing ~20% of SKUs in the US by early next year), with savings to support investments in A&M and value. PEP noted solid retailer support for its commercial plans, and that it expects shelf space to increase in 1H26.
A Potential +20% Return (With Little Downside Risk)?
"You can't get killed falling off the curb."
- Grandma Koufax
Reflecting the well-known product threats, PepsiCo's valuation has rarely been more depressed — at 16x estimated 2027 calendar EPS (down from 24x in 2020 and at a 20% discount to its multi-year mean valuation). The cash flow multiple to enterprise value has fallen from 16x to only 13x in the last five years.
With expectations so low, any surprise to the upside will likely be greeted quite favorably.
It might surprise some, given PepsiCo's market position and history, that the company's market valuation is currently less than $200 billion (or only about 2x 2026 sales).
PepsiCo recently increased its dividend by +5% to $5.69/share — providing a healthy dividend yield of 4%.
A reasonable price target of 18x 2027 projected EPS (still about 10% below peers Procter & Gamble (PG) and Coca-Cola (KO) ) produces a $165 share objective (vs. current share price of around $143). If achieved, this is a possible return in excess of +20%.
Here is a summary of three recent sell side upgrades (in price targets):
PepsiCo price target raised to $164 from $155 at BofA BofA analyst Peter Galbo raised the firm's price target on PepsiCo to $164 from $155 and keeps a Neutral rating on the shares. Entering 2026, the largest unresolved question for staples remains consumption growth and valuations remain dispersed across the group, but "there feels little to get them off the sidelines in '26 until fundamentals signal a greater turning of the tide," the analyst tells investors in a year-ahead note for the consumer staples group.
PepsiCo price target raised to $170 from $165 at Citi Citi analyst Filippo Falorni raised the firm's price target on PepsiCo to $170 from $165 and keeps a Buy rating on the shares. The firm adjusted targets in the beverages, household and personal care sector as part of its 2026 outlook. Citi is shifting from a bullish stance on the non-alcoholic beverage space throughout 2025 toward favoring the household and personal care names. It sees improving fundamentals for the group due to the cycling of inventory destocking and easier consumption compares.
PepsiCo upgraded to Overweight from Neutral at JPMorgan JPMorgan analyst Andrea Teixeira upgraded PepsiCo to Overweight from Neutral with a price target of $164, up from $151. The firm believes the company's "accelerated agenda" of innovation and marketing spending will drive strong productivity savings. This should position PepsiCo to drive high-single-digit total shareholder return in 2026, which benchmarks well against its high-quality peers, the analyst tells investors in a research note. Meanwhile, JPMorgan says the shares are trading a "steep discount" relative to the group.
At the time of publication, Kass was long PEP and PG.
