Trade Update $SODA – Almost Too Quiet, Taking Profits

by Enis March 27, 2013 2:19 pm • Commentary

Trade Update  March 27th, 2013, 2:20 pm:  SODA has been very quiet in the past 3 weeks since I put on the range trade, almost too quiet.  This has been a volatile stock in the past, but has hardly moved in the past 3 weeks.  With 3.5 weeks left until expiration, I’d rather take my profits now than risk increased volatility, especially since implied vol is now at multiyear lows in SODA.

Action: Sold the SODA ($49.40) Apr 45 / 50 / 55 Call Fly at $2.40 for a $0.75 gain

Original Post March 7th, 2013:  Pop or Fizzle?

Cummins stock has been on a tear ever since the stock reduced its guidance in early October, a good example of bad

SodaStream is a polarizing company and a polarizing stock.  Some people love the carbonation systems, others think it’s a useless fad.  Meanwhile, the stock has a short interest of about 43% of the float, one of the highest in the market.  That’s especially surprising since that type of short interest usually exists only for “broken” story stocks, and SODA does not seem broken at all.

Short interest aside, what piqued my interest in SODA stock was the increasing number of friends who have bought the machines.  When I looked at the stock’s fundamental metrics, it was one of the few growth stories in the current market that potentially looked undervalued.  Before getting to valuation though, here are some excerpts from their most recent earnings report on Feb. 20th:

The impressive growth in the U.S., directly from their release:

Screen Shot 2013-03-06 at 2.39.02 PM


The main reason for that growth in the U.S. was due to sales of the Soda Maker Starter Kits.  So my anecdotal feeling is backed up by the numbers.  SODA is getting serious traction in the U.S.

As for 2013 guidance, the company said that it expected revenue and adjusted earnings to grow 25% in 2013.  That brings us to the question of valuation.  Normally, new, innovative product companies like SODA are excessively valued, but SODA actually looks a bit undervalued.  Granted, the company is no longer expected to grow 40%+, as it was in 2010 and 2011, but even at 20-25% earnings and sales growth, a multiple of 23.5x is on the cheap side of this market.  Clearly, many market participants don’t think the company can achieve its guidance going forward.  Here is the historical P/E:

Trailing P/E for SODA, Courtesy of Bloomberg
Trailing P/E for SODA, Courtesy of Bloomberg


The multiple has ranged between 17 and 32, so it’s not at either extreme relative to its own history.  But what gives me confidence is its most recent earnings report.  The traction it has gained in the U.S. should give it more growth opportunity going forward.

Interestingly, the price action has been relatively weak since earnings.  Here is the 1 year chart:

1 year daily chart of SODA, Courtesy of Bloomberg
1 year daily chart of SODA, Courtesy of Bloomberg


The $45 level (red line) acted as resistance multiple times in 2012, but the stock cleanly gapped through that level on the first day of 2013, and has not traded below that level ever since.  I’ve circled in green the price action on SODA on the day of earnings.  The stock traded below 50 on that day despite a decent report, and has not been able to regain that level.

Looking ahead, I expect 45 to continue to act as major support.  Against that, the recent high in the stock was around 54.  It will likely take a real news catalyst to get over that level, but the next earnings report is not until May 9th.  In addition, the fundamentals look longer-term positive, but since the last earnings report did not bring out buyers, I expect the stock is stuck for now.  So I am going to target the 50 level, the middle of that range, for a trade over the next month.

TRADE: SODA ($49.20) Bought Apr 45/50/55 Call Butterfly for $1.65

-Bought 1 Apr 45 Call for $5.19

-Sold 2 Apr 50 Calls at $2.14 each

-Bought 1 Apr 55 Call for $0.74

Break-Even on Apr Expiration:

Profits:  Profits up to 3.35 when stock between 46.65 and 53.35 on Apr expiry, with max profit of $3.35 with stock at 50

Losses:  Up to 1.65 between 45 and 46.65, and between 53.35 and 55, with max loss of 1.65 at 45 or below, or 55 or above.

Trade Rationale: I like SODA as a longer-term long position in a market with a dearth of good long opportunities.  In that regard, I want to target a gradual appreciation in the stock over the next month, but with no expectation for a large move in either direction given the rangebound technical picture and no catalysts.  In this structure I played that range by putting on a structure that benefits from time decay and will be profitable if the stock doesn’t make any large moves up or down before expiration.