With the benchmark S&P 500 sidelined until Wall Street gets further confirmation regarding a potential interest rate hike by the U.S. Federal Reserve, many investors are turning their attention toward individual stocks to buy.
Beverage companies in particular look promising, as they often feature stable growth, consistent dividend yields and a largely secular market.
The Consumer Staples SPDR ETF (XLP) — an exchange-traded fund that has several leading beverage stocks in its holdings — is up 4% year-to-date, double the returns thus far for the S&P 500. A more representative indicator is the PowerShares Dynamic Food & Beverage (PBJ), which leads both of the aforementioned assets with a YTD performance of nearly 8%.
Still, it’s been a choppy year for beverage companies, emphasizing the importance of picking the stocks to buy with the highest probability of success. The aforementioned ETFs have made little headway since mid-August — PBJ in particular is down more than 3% since Aug. 17.
The soft drink business is an industry where a single misstep in production, pricing or promotion could have serious consequences in the markets, as well as toward brand perception.
Given so many areas in which beverage companies can either rise or fall to the occasion, there is no shortage of winners and losers.
Here are two stocks to buy and two to avoid.
Beverage Stocks to Buy: Pepsi (PEP)
In a tight economy where competition is growing increasingly fierce, Pepsi (PEP) may have pulled off a stroke of marketing genius last month.
Heavily featured in a three-episode segment on the popular Twenty-First Century Fox (FOXA) television drama Empire, PepsiCo highlighted its brand image as a fresh, culturally relevant entity. Likewise, it’s hoped that such efforts help differentiate PEP stock as one of the better stocks to buy in the crowded beverage industry.
Technical performance overall for PEP stock supports the bullish argument, with shares up nearly 7% YTD. In addition, PepsiCo responded heartily to the broad market correction from a few months back, leapfrogging 14% in the markets against its August bottom.
Detractors may argue, however, that the ride in PEP stock has been anything but stable this year. Also, commonly viewed technical indicators imply a murky forecast.
Nevertheless, recent earnings performance has been stellar.
Since the first quarter of fiscal year 2012, PEP stock has beat Wall Street consensus target 15 times, with an average surprise of 6%. More importantly, PEP stock has returned an average of 4% in the three months following an earnings release date.
Until that momentum shows consistent fading, PEP stock can likely be called upon to continue providing steady gains in the markets.
Beverage Stocks to Buy: Monster Beverage Corp. (MNST)
Red Bull may give you wings, but shares of Monster Beverage Corp. (MNST) will make you rich — at least that’s the unspoken message management would have you believe. But this is something beyond mere conjecture.
The battle of the energy drinks has been a hotly contested one, with estimates showing that Red Bull controlled 43% of market share, while Monster is tight on its tail at 39%.
Recent developments, however, just might give the edge to MNST stock in the years ahead. Through its partnership with Coca-Cola (KO), Monster Beverage is planning to cross into Russia and China, which has huge implications for both the top and bottom line.
Back home, its deal with McDonald’s (MCD) is already materializing, with Monster drinks being sold at 20 McDonald’s locations.
It’s also hard to ignore MNST stock’s financial strength on multiple levels despite mixed earnings results recently. Annual sales have shown consistent growth over the past three years, even as the energy drink sector appears to have become saturated.
Quarter-over-quarter growth averages 12% for the year so far. In addition, operating and net margins are among the highest in the soft drink industry, contributing to positive net income trends for MNST stock.
Finally, Monster Beverage has no debt, freeing up options for further expansion or other endeavors.
Some may argue that MNST stock is overpriced against both trailing and forward earnings, and they’re right, at least on paper. But in the markets, Wall Street can’t get enough. MNST stock is up over 23% YTD and the fundamentals are very bullish across the board.
Beverage Stocks to Sell: Sodastream International Ltd. (SODA)
Israel-based Sodastream International Ltd. (SODA) is arguably one of the most interesting companies within the broad beverage sector.
Pioneering developments in carbonation systems, its products easily allow do-it-yourselfers to convert everyday tap water into fun and quirky soft drinks. Turning SODA stock into a profitable investment, however, has been a far more onerous challenge in recent years.
Sodastream has multiple vulnerabilities to address. First and foremost is revenue, which peaked in FY2013 at $563 million, and has since dropped precipitously.
Meanwhile, the competitive landscape of the home carbonation industry has not been supportive of SODA stock. Shares of Keurig Green Mountain Inc. (GMCR) have been volatile despite the introduction of its Keurig Kold, and GMCR’s saving grace came in the form of an acquisition. Pricing issues aside, there just doesn’t seem to be that much demand to justify SODA stock’s current value in the markets.
A contrarian argument may be that much of the downside has now been priced into SODA stock. Investors have lost more than 30% for the year, but in 2014, SODA stock dropped nearly double that amount. And recent technical action does suggest that shares are stabilizing.
Still, SODA stock is a big risk to take: Operating and net margins are very light compared to its industry, and it will take a tremendous push to regain sales momentum lost over the past two years.
Beverage Stocks to Sell: Cott Corporation (COT)
While not necessarily a household name, Cott Corp. (COT) — with over 9,000 workers on its payroll — is one of the world’s biggest beverage makers and has an extensive bottled water delivery services network.
Last month, Cott announced the acquisition of rival Big Rock Springs, further cementing the company’s dominance in the water delivery business. Will this be enough to stabilize COT stock’s worryingly choppy action in recent sessions?
The fundamentals don’t exactly exude confidence. Over the past four years, earnings results for COT stock have received a mixed reception from Wall Street.
Despite strong revenue trends overall, growth in per-share earnings have been largely fading, a product of sharply declining operating margins that rank among the beverage industry’s worst. In addition, COT stock absorbed a sizable increase in debt relative to liquid assets in FY 2014.
Of course, the bulls will immediately point to the fact that year-over-year, COT stock is up 57%, more than doubling the YOY return of high-flying MNST stock. But when placed against trailing earnings, COT stock — at its present value in the markets — is quite an expensive venture. Even against forecasted growth, potential investors would have to pay more than 30 times earnings.
COT stock has done extraordinarily well over the past 52-weeks, besting most everyone’s expectations. The present challenges in its financials, however, as well as the now lofty valuation, suggest that the markets may have gone ahead of itself.
As of this writing, Josh Enomoto did not hold a position in any of the aforementioned securities.