Review & Outlook

Our take on the investing, financial, & economic themes of the day

Five Lessons from Investing in Sodastream

Businessweek had a piece this morning about Sodasteam (SODA), a company that makes a make-your-own-soda machine, which called to mind some painful memories. We bought the stock for our small cap fund last year and it didn’t work out. The stock plummeted, and we quickly got out with a loss not too long after buying it.

The silver lining is that whenever you make a mistake in investing, there are always useful lessons to be learned. So what happened with Sodastream and what lessons did I learn from the experience?

soda

1. A good story is important, but don’t let that distract you from the numbers. Sodastream was a pretty compelling David and Goliath story. The small trendy upstart aimed to disrupt Coke and Pepsi and the soft drink industry by providing a cheaper, healthier, more environmentally friendly and more convenient do-it-yourself alternative. When we were considering the stock, the machines were increasingly popular and were already well-established in Europe.

Sodastream’s cola drinks taste just like Coke, people say, but you can tweak the amount of syrup or carbonation, and you don’t need to store cans or bottles or lug them home from the store or dispose of them. Coke (KO) and Pepsi (PEP) who have reaped vast profits from marketing unhealthy sugar water seemed ripe for disruption. Sodastream had a Super Bowl commercial challenging the soft drink giants that went viral. At the point we were considering it, the stock had strong momentum and earnings growth to confirm the story.

Because we bought into the exciting story, we didn’t take the time to take a close enough look at the numbers. It turned out the valuation was more expensive than we realized, the trend was not as firmly established as I had though, and the company was heavily shorted, which is another red flag. A more in-depth valuation and analysis would have revealed these flaws.

(Source: Sodastreamusa.com)

2. Pay attention to the price at which you buy. This might seem obvious, but sometimes if you get swept up in the enthusiasm for a stock and have put a lot of work into research, there’s a temptation to just jump in at the current price whatever it happens to be. With Sodastream, takeover rumors sent the stock soaring just before we planned to buy. Rather than reevaluating the stock based on the new  price, we jumped in. When the acquisition rumors proved false the stock pulled back sharply, and this was a catalyst for a larger downturn in the stock.

3. Make sure the product has a strong competitive advantage. While Sodastream has a good brand, its technology is not exactly cutting edge. It is something that can be fairly easily copied. When Coke announced a joint venture with Keurig Green Mountain (GMCR) to build a competing soda machine, Sodastream stock fell even farther.

4. Study the stock chart. I am not a huge proponent of technical analysis of stock charts, but looking closely at the chart does tell you a lot about the company’s history. While I did look at Sodastream’s chart, a closer examination would have revealed that the stock was highly volatile and had undergone a massive boom and bust after its IPO in 2011. This should have been a red flag, and I should have examined what caused the 2011 plunge to see if it might happen again. Maybe it would have changed the decision to buy to a wait and see.

5. What we did right: we sold immediately when the story was undermined. Though Sodastream proved to be a big disappointment, it was not a disaster because it was not a large position, and we got out fairly quickly. After you buy a stock it’s important to continually follow the news to see if the narrative holds up.  Had we waited around for a rebound or the rumored takeover, we would have had a much larger loss.

The Businessweek article I mentioned detailed Sodastream’s plans for a comeback. The company said it would change its marketing strategy to cater to individual countries or markets. The author took a skeptical tone, though, pointing out that the trend was in decline. Sales in the Americas region slid 14 percent year on year after already falling 28 percent the quarter before that, the article said.

Though Sodastream is still a bit of a sore spot, it’s not such a bad thing to have a loss every once in a while as long as you learn from it. Also a loss can have beneficial tax consequences, offsetting part of your realized gain when it’s time to pay taxes.

Tags