I'm always on the lookout for great growth, value, and dividend plays. However, any savvy investor needs to be aware that traps abound in the minefield of stockpicking.
The Growth Trap: SodaStream International (SODA)
Everyone thinks there's plenty of room for another beverage. That's true, up to a point. However, that new beverage needs to be so groundbreaking and unique to really capture the attention of billions of consumers, or its flame will burn out as quickly as it ignited.
In this case, I'd be wary of SodaStream International. The company basically makes carbonation systems that allows people to turn their water into their own customized fizzy drink, complete with different flavors. My problem is that this is going to seem cool and novel for only so long. Just like the idea that one can make homemade ice cream or even sno-cones, after awhile, it become apparent that it's just easier to buy what you want. Soda is so darn cheap, and people visit their grocery stores so often, that just grabbing up a can of any of Coca-Cola's (KO), Pepsi's (PEP), Hansen's (HANS) or Dr. Pepper Snapple's (DPS) myriad of offerings will always be the default selection.
Take Coke, for example. It makes energy drinks, water drinks, flavored water drinks, juices, teas, coffees, sports drinks, syrups the list goes on and on. With Coke, you get a definitive stalwart growing around 10% annually, a global brand, a 2.8% dividend and pristine balance sheet and free cash flow. Pepsi's metric are almost the same, with a 3.3% yield. Dr. Pepper Snapple is much smaller by comparison, but generates a few hundred million in free cash flow, and has a 3.4% yield. SodaStream is projected to grow 33% annually and is trading at a P/E of 47. But here's the kicker: Coke has a net margin of almost 30%. SodaStream will never be that profitable as its margins are only 8%.
The Value Trap: Bank of America (BAC)
Bank of America is not in a good place. Although the bank denies that it needs to raise capital, it still carries an ungodly amount of toxic mortgages and the Countrywide purchase was deemed a mistake. Because we cannot peg the true mark-to-market regarding those toxic mortgages, how can one put a value on the company or the stock? We can't. The world economy is also too shaky for me to have faith in this particular bank at the moment. I don't care how cheap the shares appear to be. I want certainty before I'll step in.
The Dividend Trap: World Wrestling Enterprises (WWE)
WWE is struggling. The company has not recovered the way that theme parks such as Cedar Fair, L.P. (FUN) have over the past year. No slight against the McMahon family, which has created an extraordinary company. But growth is hard to come by for this franchise. As wrestling fans grow older, they move on to other things, and are replaced by newer, younger fans. The company is still searching for that growth engine.
It may very well find it, but as many predicted, the company had to cut its dividend significantly. I believe WWE will have to do that again, so don't be enticed by the current 5.1% yield. The company has had a profit of around $50 million each of the past three years, but is on track for about $46 million this year, or $0.63 per share. The dividend is $0.48 per share, for a dividend payout ratio of 76%. Even on 2012's earnings of $0.78, it's a 61% payout ratio. That's unsustainable.