Is SodaStream the Next Green Mountain?

Short it if you can, or use covered calls or naked puts to play this fad stock

By Lawrence Meyers, InvestorPlace Contributor

Oh man, I think I’ve found the next fad stock.

SodaStream International (NASDAQ:SODA) has, on the surface, a great idea. It makes a device that carbonates beverages so you can make your own soda at home.

Well, that’s all well and good, but this is going to seem unique for only so long. Just like the idea that one can make homemade ice cream or even sno-cones, after a while it will become apparent that it’s just easier to buy the already-made product. Soda is so darn cheap and people visit their grocery stores so often that just grabbing a can of any of Coca-Cola‘s (NYSE:KO), PepsiCo‘s (NYSE:PEP) or Dr Pepper Snapple‘s (NYSE:DPS) offerings will always be the default move.

Take Coke, for example. It makes energy drinks, water drinks, flavored water drinks, juices, teas, coffees, sports drinks, syrups — the list goes on and on. It’s just so much easier for me to buy that stuff on the cheap than to make it at home. I feel like these devices are the sort of thing you find in SkyMall catalogs or at The Sharper Image.

It also gives me a queasy feeling when I think about Green Mountain Coffee Roasters (NASDAQ:GMCR). Green Mountain’s K-cup is a product that’s good enough that Starbucks (NASDAQ:SBUX) is ripping it off, so it isn’t a fad. But sales of the company’s flagship product has been flagging significantly.

I think that demonstrates that there are only so many SodaStream devices that are going to sell. While both products rely on the old cheap razor/pricey blades model, SodaStream’s razor is a one-time purchase that, unlike Green Mountain’s product, is likely to get less use over time as people tire of making their own soda.

Let’s look at beverage stocks for comparative value.

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’s growing at 6%, with a 3.1% yield. Dr Pepper Snapple is much smaller by comparison, but it still generates a few hundred million bucks in free cash flow and has a 3.2% 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 never be that profitable since its margins are only 10%.

So what’s the play? Given that SodaStream fell off a cliff last year, from $77 down to $30, investors may have caught on to my thesis and refuse to bid the stock up until they see evidence that it isn’t a fad. Thus, it may be a value trap to buy in here, as the stock has mostly traded between $30 and $40 since.

It’s possible the stock may bounce up to a 30 P-E depending on quarterly results, so it could trade back up to $60, but I think that’s unlikely. It’s probably a long-term short, provided you can find shares to short, because I can’t.

The other way to go is to buy the stock and sell a covered call that expires before an earnings report. The stock’s volatility is such that you can earn very generous premiums either by selling covered calls or naked puts. If you get stuck long on the stock, the trading range has been such that you should be able to unload it without incurring much loss.

Lawrence Meyers does not hold shares of any company mentioned.

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