by Lawrence Meyers | September 12, 2012 9:50 am
I don’t like soda. I know, I know, call me weird. Call me crazy. I’ve never liked the carbonation, and I’m not crazy about champagne, either.
That doesn’t make me stupid, however. I think shares of Coca-Cola (NYSE:KO) are a Forever Hold. Soda is one of history’s greatest inventions. The gazillions of gallons that everyone from here to the furthest reaches of earth drinks every day is a testament to its staying power.
Which is why you’d think that SodaStream International (NASDAQ:SODA) would be a great stock. The problem, however, is that SodaStream not only doesn’t solve a problem, it actually creates a complication. Great companies solve problems, after all.
SodaStream allows you to make your own soda at home. That sounds like a nifty idea at first. Carbonate it yourself, choose your own flavor, make it at your convenience. I’m sure many people have also thought it would be a great idea to make their own ice cream.
Have you ever tried making your own ice cream? It’s really difficult, time-consuming and never yields a product as good as what you’ll find in Safeway (NYSE:SWY).
This is the same problem with SodaStream. You have the world’s premier flavor houses constantly creating an infinite selection of soda flavors, offered under dozens of brands, at prices that are ridiculously cheap. Why am I going to buy a product that requires me to exert labor, to achieve a product that isn’t any better, at much higher prices? I’m not, nor do I think many more people will, either.
I think SodaStream is a momentum fad stock.
In fact, why not serve up some SodaStream stock alongside the other overpriced mo-mo stock, Chipotle Mexican Grill (NYSE:CMG)?
If you want to play soda, then play soda. With Coke, you get a stalwart that’s growing at around 9% annually, a global brand, a 2.7% dividend and a pristine balance sheet and free cash flow. Pepsico (NYSE:PEP) is growing at 6%, with a 3% yield. Dr Pepper Snapple (NYSE:DPS) is much smaller by comparison, but it still generates a few hundred million bucks in free cash flow and has a 3% yield.
SodaStream is projected to grow 30% annually and is trading at a P/E of 18. Arguably, it’s trading as a growth-at-a-reasonable-price (GARP) stock. But here’s the kicker: Coke has a net margin of almost 30%. SodaStream will likely never be that profitable — its margins are only 10%.
Just because the concept doesn’t have staying power doesn’t mean it’s a short at this exact moment, however. That’s the problem with momentum stocks: You have to short them at the peaks. There are short-term peaks, and then often some kind of blow-off top.
What I do see is that 60% of the float is already being shorted. That’s a danger sign if you’re short right now, because you could find yourself squeezed out of your position. It also means you’re probably paying a vig to borrow shares to short.
I would keep a close watch on SodaStream. At some point, there will be a short squeeze. When that happens, the stock is going to jump. At that point, I would actually buy a very long-term in-the-money put that wipes out any extrinsic premium value. That way you won’t pay a vig or risk having that vig raised on you, as once happened to me with another short I once held.
So keep an eye for SodaStream’s fizzy blow-off, then pull the trigger.
Lawrence Meyers does not hold a position in any security mentioned.
Source URL: http://investorplace.com/2012/09/a-sure-fire-short-where-youd-least-expect-it/
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