Monster Beverage’s Surprising Swing: Not All That Surprising

by James Brumley | June 6, 2013 8:22 am

Chalk it up as a lesson learned … the time to buy Monster Beverage (NASDAQ:MNST[1]) was in November, shortly after the company was threatened with a wrongful death lawsuit[2], right in the midst of the media’s fear-mongering, and against an onslaught of selling of the stock. Shares of MNST have gained nearly 30% since then, rallying sharply in complete defiance of presumptions — at the time — that the company was on its deathbed.

And in case you’re wondering, the stock still might have more upside left to tap.

As Bad as It Gets

In March of last year, a 14-year-old girl from Maryland tragically passed away shortly after consuming two of Monster Beverage’s caffeine-laden drinks. It wasn’t clear if the death was caused by a caffeine overdose, or if it was simply circumstantial. It was certainly alarming, though, and few were surprised when the girl’s parents announced in October they would be bringing a suit against the company.

The media, of course, pounced on the story, spreading it at will (though a story about the death of a 14-year-old doesn’t need much help proliferating). The financial media didn’t take long putting two and two together for the company, either, noting that the nasty publicity alone could stifle sales of energy drinks. And if the family of the deceased was successful in its suit, it could open the litigation floodgates, torpedoing not just Monster, but all of its energy drink peers.

A funny thing happened on the way to Monster’s funeral, though … the stock recovered, as yours truly suggested would be the case in November[3].

Earnings for the quarter following the announcement of the lawsuit were higher than the year-ago number, and earnings for the subsequent quarter also were better on a year-over-year basis. YOY revenue for both quarters following the bad news was up, too.

So why didn’t sales of Monster Beverage’s highly caffeinated drinks come to a screeching halt as the financial media implied they could, and as consumers suggested they would? And what the heck inspired so much buying of a stock that was supposed to have so much working against it?

Glad you asked.

How the Market Really Works

Theoretically, a stock’s price at any given time reflects the current value of a company’s operation. Oh, investors understand that you own a stake in a company for where it’s going, and since nobody can predict the future, there’s a certain amount of speculative value priced into any stock. By and large, though, valuation models assume any and all relevant information can be plugged into a neat and tidy formula to come up with a fair value for shares of any publicly traded company.

In the real world, things are much messier. Stocks don’t reflect a company’s current value — at all. They don’t even reflect a likely value six to 12 months down the road. A stock’s current price is a prediction of how investors think the market is going to feel about a particular company six to 12 months down the road.

The problem with predicting opinions is, they’re an ever-moving target.

In the case of Monster Beverage, shares tumbled from a peak of $79 in June of last year to a low of $40 by mid-November not just based on the likelihood of the lawsuit, but also because the wave of bad publicity threatened sales of energy drinks. Sales never slowed, though. And that lawsuit is now in mediation; the company seems to have plenty of evidence in its favor, too.

What’s really amazing here is that another lawsuit has surfaced in the meantime … one that should really concern investors. The city of San Francisco is now suing MNST for marketing its product to children. Odds are the city has deeper pockets to bring a suit against the company than the girl’s parents do, yet that news hasn’t seemed to impact the stock at all; shares reached a multimonth high Wednesday.

Bottom Line

The moral of the story is, the news only matters when it matters, and a stock’s price is frequently little more than a reflection of public opinion at the time.

As for would-be Monster Beverage investors, the stock’s not exactly a screaming value here, priced at a trailing P/E of 32 and a forward-looking one of 23.4. Then again, it’s not a question of value. The market’s falling in love with the company again, good reason or not. As was the case with the 2011-12 rally and the pullback in the second half of 2012, the right move here is just to follow the crowd as long as the crowd is moving.

Just be ready to get off the train at a moment’s notice. The folks who were betting against the stock in November — when the news was at its worst — got burned if they were stubborn. The current buyers could be just as easily burned for being stubborn, especially if the San Fran lawsuit looks like it’s going somewhere.

As of this writing, James Brumley did not hold a position in any of the aforementioned securities.

  1. MNST:
  2. threatened with a wrongful death lawsuit:
  3. yours truly suggested would be the case in November:

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