Investment Update $SODA – Selling A Call Against Long Stock

by Enis March 31, 2014 12:27 pm • Commentary

SODA has rallied more than 10% over the last month.  The news flow in the stock has been relatively quiet, with only a few news items that caught my eye in that period.

First, Whitney Tilson disclosed that he had bought the stock, and made the fundamental valuation-based case for owning SODA.  Second, Scarlett Johansson defended the SodaStream ad which was supposed to air for the Super Bowl, but removed by Fox, likely to prevent future retribution from Coca Cola and Pepsi.  Third, KitchenAid introduced a new sparkling beverage maker that will be powered by SodaStream.

The volume in the past month has been quite light after heavy volume in January (bad earnings) and February (buying after the GMCR / Coca Cola deal).  The stock has approached the $46.50 level (in red), which around the 1 year low prior to January’s earnings gap lower:

SODA weekly chart, Courtesy of Bloomberg
SODA weekly chart, Courtesy of Bloomberg

Technically, that looks like ample resistance up ahead for SODA.  While the fundamental case is attractive, the stock has rallied almost 15% in the past month since our entry.  With resistance up ahead, we are going to take advantage of the high implied volatility in SODA to sell the Apr19th 45 call at $2.30 against the long stock position.

ACTION – Sell the SODA ($44.64) Apr19th 45 Call at $2.30 to open against the long stock position (cost basis in stock position of $39.40).

If SODA closes above $45 on Apr19th expiry, we will have sold our stock position at $47.30, which is close to our initial target for the position.


New Investment – A Takeout Would be the Cherry on Top, February 28, 2014

Here’s our next addition to our investment portfolio:

SODA has been in the news ever since Coca-Cola announced its stake in GMCR earlier this month.  We discussed our view on SODA specifically and the implications of that Coca-Cola stake in a Name That Trade post on February 6th:

However, our initial take was that the simple entry of Coke into the market legitimizes Sodastream’s business and overall market opportunity.  In fact, Coke’s competitive foray with Green Mountain might entice Pepsi to take a more serious look at SODA.  After all, a $1 billion purchase of SODA would be chump change for either of the beverage behemoths.

Which is why it’s a bit surprising that neither has bought the company so far, especially since they’re obviously wasting time and energy on the potential threat from SODA (like preventing Sodastream ads from airing on the Super Bowl).  Traders in the pre-market were likely thinking the same thing, as SODA bounced from $33 to over $40 in light trading ahead of the open.

Finally, SODA’s fundamental valuation is quite cheap on its own, even with no takeout consideration.  Here is the stock’s trailing 12 month P/E multiple, hitting a new low near 15 this week:

SODA 12 month trailing P/E, Courtesy of Bloomberg

SODA 12 month trailing P/E, Courtesy of Bloomberg

SODA earned around the same in 2013 as it did in 2012 (near $2.40 per share), and that lack of earnings growth is why the stock got hammered in the second half of the year.  However, the stock’s 15 P/E might now be too pessimistic, as analysts still project 10% earnings growth in 2014, which would be a good result for a 15 P/E name.

SODA has seen buyers active since that news, as the stock traded as high as $45 this month.  However, sellers have been undeterred, selling each bounce over $40, clearly concerned about the earnings ability of SODA after its dismal January earnings report.  Moreover, the fact that Israel based SODA has a factory in the West Bank might deter potential acquirers, particularly international brands like Coca-Cola and Pepsi, due to the political/publicity complications.

However, we see two main positives here for a new long stock position.  First, SODA is priced quite reasonably on its own, even if there were no takeout speculation.  The stock is around a 20x trailing 12 month P/E with 20% earnings growth expected over the next couple years.  That’s decent on its own.  So buying the stock here gets it for no potential takeout premium.  For a $825 million market cap company, that’s a decent deal.

Second, SODA still has 45% short interest, while the top 10 holders own 50% of the company.  So you have a relatively concentrated ownership base and a high short interest.  As a result, even with no positive news over the next few months, we see limited downside for the stock.

Options are too wide, so we opted for simply buying the stock for our investment portfolio.

TRADE: Bought SODA for $39.40

Our ideal target for this position would be the gap fill around $50.  In the meantime, if the stock breaks the $35 level, we’ll like take our losses and move on.  Given the volatility in the stock over the last year, we don’t want to overstay our welcome if we are wrong.