Sometimes, you just get lucky and get a gift from the marketplace, just like the one many investors received yesterday when the opportunity to purchase shares of SodaStream International (SODA) on sale by nearly 8% intraday came about. What caused the sell-off in shares of SODA yesterday was on the minds of thousands of investors, especially those who piled in over the last few weeks. I will get back to the cause for the sell-off momentarily, but first let's talk about short interest.
Many investors saw the momentum behind shares of SODA over the last two months, and when they took a peek at the short interest… need I say more? Presently, near 50% of the float is held short, but yesterday is just another example of why investors should not expect a "short squeeze," according to the investing text book example of a "short squeeze." A text book example of a short squeeze is rapid, volatile and results in a sustained price movement, holding a base level well below where the subsequent short squeeze took place. In the case of SODA, and as is clearly depicted by the Nasdaq short interest report, SODA did not experience any such short squeeze, but rather a healthy long and drawn out period of short covering, which helped in part to increase the PPS. Secondly, the short interest reversed dramatically as of the very latest Nasdaq short interest report. So if you are an investor looking for a short squeeze in SODA, you might be better off investing in SODA based on the fundamentals, which are far less speculative and therefore, more defined.
Shares of SODA took a dramatic turn downward yesterday after word hit the Street that the Department of Transportation (DOT) regulations now consider empty CO2 cylinders to be HAZMAT, which led to a decision by carriers such as UPS and FedEx to stop picking them up from private homes (or drop-off locations) due to the fact that residences are not HAZMAT certified. SodaStream continues to work collaboratively with the DOT, UPS and FedEx to evaluate alternative solutions for residential returns, and will provide an update on any developments as soon as they become available.
So let's evaluate what this means for SodaStream and its respective customers, as well as investors. First, the DOT's decision basically slaps a HAZMAT label on used residential CO2 canisters/cartridges. Generally, this means that UPS or FedEx can't pick-up CO2 canisters/cartridges from residents that are not HAZMAT certified, and most residences are not HAZMAT certified. Now, if you want to order your full spare CO2 on-line from SodaStream, eBay (EBAY), Amazon (AMZN) or any online retailer, this is still no issue, as all retailers who sell CO2 for SodaStream are HAZMAT certified. Therefore, UPS and FedEx can always deliver CO2 to the consumer without worry. Brick and mortar retailers who currently sell and exchange CO2 to the public ARE NOT affected by the DOT regulation because they are all HAZMAT certified. HAZMAT certification is one part of the process retailers go through before adopting the CO2 exchange and sale program with SodaStream. You can still go to your local Wal-Mart (WMT), Macy's (M) Williams-Sonoma (WSM), Staples (SPLS) or Bed Bath and Beyond (BBBY). There are current over 9,000 retail locations in the U.S. where the consumer can exchange his/her CO2 canister.
Taking this issue one step further, let's look at the SodaStream business to better understand the implications from the DOT regulation. SodaStream does less than 2% of CO2 60L sales through residential pick up and delivery during the year. One more time for those not paying attention -- less than 2% during the year. It is a miniscule and almost irrelevant part of its overall business. And it is likely that this less than 2% will simply start doing their exchanges at retail locations. With that in mind and understanding that more than 98% of SodaStream CO2 sales transactions in the U.S. take place at a retail location, SodaStream prefers this entirely. SodaStream wants its customers to visit retailers because this will produce more impulse buys or need-based buys on the part of the customer as they frequent retailers more often during the year. In fact, sodastream.com attempts to steer customers towards its retail distribution partners. See a syrup, pick it up, and all day long you'll have… well, soda. So as you can clearly see through carefully researched information, the DOT decision could actually be beneficial for SodaStream.
In closing, I'm sure the SodaStream long investors were grateful for the sale on SODA yesterday, as for many, it represented a buying opportunity. This is not to say that the share price couldn't get any cheaper, but we are pleased to shed light on the recent facts regarding the DOT regulations and how very little the regulation will affect SodaStream.
Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.