I have never spent much time on momentum stocks. These stocks
tend to move higher and higher with seemingly no regard for the
fundamentals of the underlying business. When momentum investors
lose interest and sell their stakes, there's little support in
place, and these stocks can tumble swiftly lower.
Just in 2011, we've seen some of the most popular momentum stocks
get crushed in a very short time. Restaurant reservations firm
soared from $70 at the start of the year to above $170 by late
April. But once signs of a slowdown emerged, the stock fell and
fell until bottoming out around $30.
has quickly morphed from the company that could do no wrong into
the company that could do no right, and now trades for about
one-fifth of its
At some point, these beaten down stocks could represent real value,
and intrepid investors can start to wade in. The key is to wait
until all of the sellers are flushed out. This approach is
especially crucial at a time known as the "December effect."
Historically, any stock that has fallen sharply is a candidate for
even more selling at the end of the year as investors seek to dump
losers to offset their winners for
capital gains tax
purposes. This action is now so widely anticipated that these
stocks now get sold off a month ahead of the anticipated
traditional tax-loss selling period. So some of these big losers
can actually start to rebound in late November and pick up a head
of steam in December and beyond.
That's what I think is happening with
, which makes a carbonated drink machine for individual home use.
(If you're familiar with
Green Mountain Coffee's (Nasdaq:
Keurig device for coffee, then you can begin to see parallels
between the two stocks, in more ways than one.)
Simply put, I think the stock is slowly springing back to life
after a precipitous fall.
The key in looking for value among beaten-down stocks is to assess
what a new
for the stock should be. Even if you think it is now too cheap, you
may still need to wait. Even after a 41% one-day plunge in August,
SodaStream had further to fall as formerly
investors only slowly shook out of the stock. I think they're done,
as this next chart shows.
So what happened to this highflyer? In mid-August, Sodastream met
second-quarter expectations, highlighted by a roughly 40% jump in
sales and profits from a year earlier. In its first few quarters as
(The initial public offering took place in November 2010),
Sodastream established a pattern of boosting guidance for the
subsequent quarters. Not this time. Failing to do so led many to
believe that what was a high-growth platform might suddenly be
After all, this is a company that saw sales jump 53% in 2010 to
around $160 million. Now, sales growth is unlikely to top 40% in
2011, and the growth rate could cool to 20% in 2012 to around $270
The good news: that level of growth can be sustained for a while as
Sodastream systems sell to more markets. For example, the company
announced in October that it has begun selling its machines and
syrups in Japan. The company will enter the Brazilian
in 2012. A move into India may be next, according to management.
Sodastream already has a strong presence in the United States and
Europe, though it aims to get even deeper retail penetration in
those markets. Sodastream is already well represented at
Bed, Bath & Beyond (NYSE:
, but is also ramping up at
Best Buy (NYSE:
The market was still digesting the sobering outlook when more
impressive third quarter results were released on Nov.9
per share of $0.68 beat consensus forecasts by 68%. Sales rose
nearly 40% from a year earlier to around $80 million. Equally
important, sales from the soda makers rose a solid 54%. Growth in
consumables (the syrup bottles used to make the drinks) rose a more
moderate 26%, but that's precisely what you should expect in a
razors/razor blades model like this. The rising installed base of
carbonating machines implies rising consumable sales in 2012 and
But the timing was awful.
rose more than $5 the morning of the earnings release to $39, on a
day that the S&P 500 plunged nearly 4%. By the end of the day,
the stock was down to $36, and thanks to the ongoing market slump,
shares moved back below $30 a few weeks later.
Risks to Consider:
The biggest risk is competition. Investors fear a beverage
giant such as
will enter the market, though some may counter that Coke would help
stimulate awareness of the whole category and help all
The key questions: what is an appropriate long-term growth rate,
what does thatmean for
, and what's a suitable target for EPS? The company has penetrated
just 0.5% of all U.S. households (including my own), and roughly 10
times that many buy bottled and canned carbonated water at the
supermarket. Let's assume that out of the 5% of U.S. households
we're talking about, 30% of them grow to realize that you no longer
need to lug home heavy bottles and cans of water, freeing up
kitchen shelf space in the process. That would triple Sodastream's
market opportunity in the United States.
Penetration rates in other markets are harder to come by, but it's
not a stretch to assume Sodastream doubles its total market in
maturing markets such as the United States and Europe and gets
decent share in new markets such as Brazil and Japan. Taken
together, investors may be looking at a tripling of the 2011 sales
base during the next five years, equating to around $800 million.
Action to Take-->
A little back-of-the-envelope math produces EPS of $5 to $6 on that
sales base. (The company is expected to earn $1.16 a share in 2011
and $1.46 a share in 2012.) It's not clear that this stock ever
deserved to trade at $80 as it did earlier this year, but at $30 it
looks far more attractive in relation to potential earnings power.
A move back to $40 in 2012 and perhaps $50 in 2013 is not
unreasonable to see. The stock at $50 in 2013 equates to a high
single-digit multiple on projected profits in the middle of the
-- David Sterman
Disclosure: Neither David Sterman nor StreetAuthority, LLC hold
positions in any securities mentioned in this article.