I'm typically not a fan of trying to time the market. It's difficult to do consistently well, which is why so many people end up doing it poorly. Just getting into a position and staying in it for the long haul is the right formula for most investors. On occasion, though, it makes sense to be at least timing-minded.
That's the case for shares of beverage outfit Celsius Holdings (CELH 4.21%) right now. The stock's up more than 50% over the course of just the past month, with a huge piece of that gain taking shape in just one day following last week's release of its first-quarter results. Obviously, those numbers were good. The stock, however, is just a little too ripe for a pullback following the run-up.
If you're on the fence about sticking with it, you might want to go ahead and use this strength as an exit point. Likewise, if you'd like to get in, now's not quite the time.
Celsius Holdings is on fire
On the off-chance you're reading this and aren't familiar, Celsius Holdings is often categorized as an energy drink name. That's not quite what the company is, though. While its beverage lineup includes drinks meant to offer an energy boost, the company also touts them as "functional" drinks, aimed at boosting metabolism and burning calories without all the sugar often found in competing energy drinks like those made by Monster Beverage or Red Bull.
And there's little doubt that the market is clamoring for this sort of product. Last quarter's top line was up a whopping 95% year over year, extending last year's sales growth of 108%.
Data source: Thomson Reuters. Chart by author. EBITDA = earnings before interest, taxes, depreciation, and amortization.
Two key forces are driving this red-hot growth. The first is demand from Gen Z and millennials.
It's a health-minded a demographic that's more likely to be a member of a gym as well as more likely to use such a product. And being digitally native with a world of information constantly at their fingertips, they're typically better informed about their health choices too. They know precisely what they want, and what they increasingly want is better-for-you ingredients without all the sugar typically added to rival brands' energy drinks.
The brand is also doing surprisingly well with young women, which is unusual in that the category itself has historically been geared toward men.
And the second key to Celsius Holdings' incredible growth? CEO John Fieldly understands the importance of putting products in the right place, and knows how to secure this retail space for Celsius-branded beverages.
Although the company no longer provides specifics about its cooler counts (for competitive reasons), Celsius did disclose during its Q1 conference call that its volume from grocers and convenience stores grew a record 95.4% during the three months in question, accelerating from a growth pace of 69.5% in the comparable quarter a year earlier. That was enough to double its U.S. market share over the course of the year. But with control of only 7.5% of the domestic energy drink market, Celsius still has only scratched the surface of its opportunity.
Nevertheless, this stock has raced well beyond a sustainable price. Expect a pullback sooner or later, and most likely, sooner than later.
In this instance, timing really is everything
Don't misread the message. Expectations for a dip from Celsius shares don't inherently suggest that things will suddenly take a turn for the worse from here. The company is doing everything right. Sales and earnings are growing, and as the graphic above shows, both should continue to do so for the foreseeable future.
Rather, bracing for a pullback is simply an acknowledgement that the stock's recent strength is emotionally charged, rooted in excessive excitement that has a tendency to unwind rather dramatically.
Take a look. While sharp rallies aren't anything new for this stock, neither are subsequent, sizable dips. The stock's rallies in 2020 and in the first half of 2022 were both met with a strong headwind, while the rally through late 2021 set the stage for a massive, multi-month pullback.
NASDAQ: CELH
Key Data Points
Given this predictable pattern of extreme volatility, there's just too much potential near-term downside on the table to ignore. Thanks to the recent run-up, the stock's now priced at 100 times this year's expected per-share profits, and more than 60 times next year's expected bottom line. You can expect to pay a premium for growth. That's one heck of a premium, though.
Just don't take Celsius off your watchlist. Every dip thus far has eventually been met with an even higher high.
Bottom line? If you're looking to step in, hold out for a dip -- maybe all the way back to the $100 area. If you're in it but not for the long haul, here's your chance to get out. In the meantime, of course, anybody who's already in Celsius Holdings as a multi-year trade doesn't need to worry about any of this volatility. Just keep on holding it.
