Why Monster's Shares Surged

Although we don't believe in timing the market or panicking over market movements, we do like to keep an eye on big changes -- just in case they're material to our investing thesis.

What: Shares of energy-drink giant Monster Beverage (Nasdaq: MNST  ) were having a monster move today, gaining as much as 28% in intraday trading after the company became the subject of buyout rumors.

So what: The Wall Street Journal reported that soft-drink kingpin Coca-Cola (NYSE: KO  ) is in talks to potentially buy Monster. The combination would make a lot of sense -- energy drinks represent a nice growth area in the slow-growth soft-drink market, and Coca-Cola already distributes Monster's products.

When one company acquires another, there's almost always some premium paid, so Monster shareholders are no doubt excited today over the premium that Coke might pay to buy their company.

Now what: Speculating on takeover rumors is a dicey proposition. While it can provide a nice bump when the rumors prove correct, it can be painful when the rumors don't pan out -- typically, the stock sinks when investors realize a buyout isn't, in fact, imminent. In the case of a Coke/Monster deal, the price that Coke would have to pay could be an issue. As The Wall Street Journal put it: "The price remains a hurdle, however, and there's no certainty an agreement will be reached." As of this writing, Monster trades at close to 40 times full-year 2012 earnings expectations.

So should investors pound a can of Monster and chase this big gain today? From this Fool's perspective, that'd be a foolish move. Grab some Monster shares if you like the company's prospects and think the current price is a fair one, but leave the buyout speculation to the stock market gamblers.

Want to keep up to date on Monster Beverage? Add it to your Watchlist.

The Motley Fool owns shares of Coca-Cola. Motley Fool newsletter services have recommended buying shares of Coca-Cola and Monster Beverage. Try any of our Foolish newsletter services free for 30 days. We Fools don't all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors.

Fool contributor Matt Koppenheffer has no financial interest in any of the companies mentioned. You can check out what Matt is keeping an eye on by visiting his CAPS portfolio, or you can follow Matt on Twitter, @KoppTheFool, or on Facebook. The Fool's disclosure policy prefers dividends over a sharp stick in the eye.


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