Here’s a little snippet from an article I wrote 15 months ago on SodaStream International (SODA), and it’s something I can’t help but think about following Monday’s implosion in SODA stock:
“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 stock is a momentum fad stock.”
Today I stand by that assertion, and that SODA stock is a fad stock. SodaStream confessed that holiday sales were less than impressive, and that it had to heavily discount its product. Now that we know all this, how can we profit from it?
The first thing to know is that SODA stock is a momentum stock. After almost every huge selloff in a mo-mo stock, the “true believes” buy more. The five-year chart of SODA shows you all you need to know — this dead-cat-bounce behavior is pretty routine.
To that end, you have a few choices.
Short Term: Buy SODA Stock to Trade Later
You can buy SODA stock outright and look to make a trade. In that case, I would have sell triggers that sell one-quarter of my position in SODA stock between the buy price, and for every 10%-12% level above that. It’s unlikely SODA stock will retrace more than 50% of its drop. I would, however, set a 5%-7% stop-loss in case the selling continues.
Short Term: Buy SODA Calls
Another choice would be to purchase call options on SodaStream stock. The buying often occurs within one expiration cycle of the fall, so you can use February strikes.
With SODA stock presently at about $37, you can buy the February 40 Calls for about $1.50. I expect to see a $37.50 strike show up in the options rack soon, and that’s an even better play since it’s closer to being in the money. Again, I would sell one-quarter of the position each time the stock rises. In this case, you may choose to sell with every 7%-8% increase, since you’ll capture some time premium.
Long Term: Short SODA
Over the longer term, you have to decide whether you are bullish or bearish on SODA stock. I happen to be bearish. As I check with my broker, there are shares to short and do not have an interest rate to be paid to borrow, which often happens with heavily shorted stocks. So I would wait for that dead-cat bounce, and short in the low $40s, a little at a time.
Once the position is established, I would also set buy stops in case SODA stock continues to rise. After all, SodaStream is not in danger of bankruptcy, as it has plenty of cash, so I would not get greedy with your short.
I would sell off your short position in four to five equal chunks between your short price and the high teens, if that happens.
Long Term: Long-Range SODA Puts
Another alternative to limit risk is to buy some long-range puts, especially if shares are not available to short. You could buy the Jan 2015 37.50 puts for about $7.20. It’s an expensive put for SODA stock, but if you are confident SodaStream shares will see $30 or less by year’s end, it’s a way to limit your risk.
As of this writing, Lawrence Meyers did not hold a position in any of the aforementioned securities. He is president of PDL Broker, Inc., which brokers financing, strategic investments and distressed asset purchases between private equity firms and businesses. He also has written two books and blogs about public policy, journalistic integrity, popular culture, and world affairs. Contact him at email@example.com and follow his tweets at @ichabodscranium.