What Can Apple Learn From SodaStream?

Includes: AAPL, SODA
by: AssetInflation

A relatively small but highly-touted company named SodaStream International (NASDAQ:SODA) disappointed investors and the stock plummeted more than 50% in 11 trading days. SodaStream sells equipment and supplies to its consumers for making their own home-made soda (razor/razor blade model). The bulls had visions of multi-decade growth as the entire addressable soft drink market is absolutely huge.

James Cramer liked it and featured the company favorably on his show. Many other analysts and commentators spoke glowingly as well, and who could argue? Since it debuted on the market in Nov '10 at $20 per share, the company delivered sales growth, earnings growth, and most importantly stock price growth to a pre-crash high of $79.72 (4x). Everything was going great for almost two years, as the market rewarded the believers and punished the skeptical. That is, until 11 days ago.

Without passing judgment on whether the bulls or bears were right or wrong, there is a major lesson to be learned that can be applied to many so-called momentum stocks. Even though sales and earnings were growing and the company was going to be the "next" long-term momentum growth story, and sages such as Cramer touted it, a small shift in perception dealt a massive death blow to many portfolios.

The bears got bled for almost two years (and I'm sure quite a few lost big money along the way), while the bulls got bludgeoned in 11 short days (and I'm sure quite a few lost big money too). If both sides can be right and wrong at nearly the same time, then the lesson is clear: Investors in momentum stocks better be careful and resist the impulse to fall in love with their version of the story (short or long). All reasonable arguments in support of valuation may be correct and logical, but the timing and execution of their validation is chosen viciously by the market.

The Apple Better Be Sweet

When reflecting on the lesson delivered by SODA, Apple (NASDAQ:AAPL) immediately came to mind as the obvious ultimate long-term momentum growth story. While Apple's success is not in question, as almost everyone knows the story of how it created value by creating entire markets, it is relevant to test the applicability of the lessons learned from SODA's demise. Apple's stock has definitely rewarded the believers and caused severe pain to any who bet against it, but could there be a massive cliff-drop in price ahead?

Bulls will argue the fundamentals and growth trajectory certainly support AAPL at these prices and, if history repeats itself, Apple might be the first company to reach the trillion dollar valuation. Bears will argue that competition is intensifying and Apple's stellar margins are soon to swiftly erode, and if history repeats itself, then the law of large numbers will catch up to them (see Cisco (NASDAQ:CSCO) circa 1999).

Applying the lesson from SodaStream, we could argue that both will be right over time. The bulls will consistently win, and bears lose, until the day comes that there is a small shift in perception and the bottom falls out. Can we see the bottom falling out as competitors like Google (NASDAQ:GOOG) and Microsoft (NASDAQ:MSFT) fight back? Yes. But can we see Apple beating competition and continuing to sell more and more iStuff throughout the world: Again, yes.

Again the lessons from SodaStream are simple: Be careful, and resist the impulse to fall in love with your version of the story (short or long). Momentum stocks have stories that seduce regular investors and professional traders alike. Each investor/trader has valid reasons for their convictions, but many forget the brutality of the market.

We believe that AAPL is a fantastic momentum stock and is going to continue its long-term trend (until the day comes that the perception shifts). For bulls, we would scale-down buy any corrections ranging from 10-20%, and then sell on new-high runs. However, we would also set a trailing stop at 20% from the past high, which would signal a classic bear market move. (Note: the stop would be $323.60 currently.) For bears, we would consistently buy far out of the money puts as the only strategy. This stock has gone and could go up for many more years. We would be careful to limit the investment so that you can take many "shots" over time. With a strong momentum stock like AAPL, you will be wrong many times until you finally hit the big drop.

For those who believe in long-term investing, we believe that AAPL is priced to perfection and is too rich at $380.44. While we certainly understand the stock is strong, we believe there are far superior investments for those with long-term horizons.

Momentum stocks are fun to trade and great to talk about. We understand why people have a fascination with their success. We remind our readers to remember the lessons of the past 11 days with SodaStream and be careful and stay out of love.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.