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Editor's note (Nov. 1, 2013): Since publication of this buy recommendation and portfolio purchase in mid-October, SodaStream’s third-quarter tidings resulted in an approximate 15% decrease in stock price. The author retains a positive long-term prognosis for the company and the stock.
Eco-friendly, Israel-based SodaStream (NASDAQ: SODA ) has been on a tear this year. However, the stock price has lost some fizz in recent months due to fears of impending, big-name competition.
I'm building this public-facing portfolio to focus on responsible companies and see how the portfolio's performance stacks up over time. These companies already possess or are adding factors like excellent management, solid corporate governance, environmentally sound policies, or social consciousness into their businesses. In a perfect world, they'd possess all of the above.
Many investors have been fretting about the prospect that SodaStream's heated growth could cool down fast. The truth is, those who have had this stock on their watchlists are being handed an excellent opportunity to add some eco-friendly fizz to their portfolios -- as well as a dash of disruptive innovation.
Rewards... and risks
SodaStream shares topped out at about $75 per share over the summer. Regardless of recent relative weakness, it's still one of the best performers in the Prosocial Portfolio (and for those investors who bought shares early). However, even amid recent worries, buying this stock right now is a much better idea than selling.
Right now, if growth continues as expected, SodaStream sports a PEG ratio of 0.87, indicating an undervalued company. Since the fiscal year ended January 2011, SodaStream has been generating torrid revenue growth; that year, it reported 48% top-line growth. In the last 12 months, revenue has increased 43% to $496 million. Over a three-year period, SodaStream has generated compound annual growth of 46.6% and 67.1% in revenue and net income, respectively.
Of course, there are risks; investors often don't enter pessimistic territory for outlandish reasons. (Sometimes their reasons are pretty nutty, of course. Short-term investors, traders, and algo-bots aren't known for calm, deep thinking.)
Some of the big players are apparently eyeing SodaStream's market, planning similar make-your-own-soda products. That does present a more difficult playing field than being the first mover in the market, with a major head start in the area of a new solution for Americans' big-time thirst. However, it's not the end of the world, either.
The idea that Starbucks (NASDAQ: SBUX ) could be planning its own soda-spouting machines has caused SodaStream's most recent fizzkill. So far, we have intelligence from the U.S. Patent and Trademark Office indicating that this similar product would be named Fizzio. (Personally, I find that a rather unfortunate name.)
My colleague Rick Munarriz pointed out an important point, though: At least in its first iteration, Fizzio is intended for institutional markets like restaurants.
Green Mountain Coffee Roasters (UNKNOWN: GMCR.DL ) got an early advantage in the single-serve coffee market with its Keurig machine. It has trademarked a product called Karbon, apparently a cold-beverage solution that in most cases echoes SodaStream's at-home bottled bubbles.
In both cases, these are trademark applications, referring to terms for such products -- not products that will hit the market tomorrow.
SodaStream is already way ahead of the game because, well, it's out there and has moved a lot on word-of-mouth buzz -- it's on shelves at huge retailers like Wal-Mart -- and it already has some powerful partners for promising make-your-own-soda syrup flavors.
The "Bring it" principle in competition
There are plenty of reasons investors should buy instead of freak out. At-home sparkling beverage machines have by no means saturated the market, and there are plentiful reasons that SodaStream and other such machines make sense for kitchen countertops.
Bloomberg contacted the company last week about the concept of impending competition, and Chief Corporate Development and Communications Officer Yonah Lloyd responded, "Home soda making is still a new category in the U.S. with over 98 percent of homes as potential customers. Any legitimate company that enters will help raise awareness, and this is good for SodaStream and all competitors."
Basically, it sounds like SodaStream's management's message is "Bring it." This isn't unusual, since it has been bold in the past. Recall its aggressive ad campaigns aimed directly at soda giants Coke and Pepsi and the massive amount of waste resulting from beverage products, whether we're talking about plastic bottles, transportation costs, or simply a waste of consumers' time and energy lugging heavy sodas to their homes.
Also, it reminds us of an aspect increasing numbers of good corporate managements understand: Sometimes competition is less terrifying than many investors think.
Whole Foods Market, a repeat Prosocial Portfolio stock, is well known for the "Bring it" mentality regarding rivalry. Whole Foods Co-CEO Walter Robb literally said, "Bring it on" recently in regard to jabs about rivalry from companies like Sprouts, which recently went public with great fanfare.
Copycatting behavior can reflect and validate a powerful consumer shift and the proof of the vision of the original innovative or even disruptive product. As long as the upstarts and forward-looking companies continuously move forward and stay one step ahead of rivals, a certain number of rivals breathing down their necks make them move faster and stronger.
The exciting world of growth stocks
SodaStream has skyrocketed in a short time, and often growth stocks can get nailed on the slightest whiff of pessimism. It can be hard to hold on, much less buy. Many of us who have been investing for a long while have seen such plunges on small or temporary issues before, and we'll see it again. For growth stocks like SodaStream, major roller coasters can be even more nauseating than SodaStream's recent dip.
Regardless, a recent attack of market nerves has served up a better purchase price. For those who are calmly holding and feeling comfortable with SodaStream's long-term prospects, or have been thirsting to buy the stock, now is a great time. That's why it's becoming a second-time buy for the Prosocial Portfolio.
Mixing in some growth
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