SodaStream: What To Expect Before Earnings

SodaStream International (NASDAQ:SODA) followed a common path that we have seen during the last six months for battleground stocks; falling by a large margin without any news to drive the stock lower. In fact, the only news for Tuesday was an article by Seeking Alpha that mentioned SODA as a stock to watch this earnings season, with earnings on August 8. The stock was volatile throughout the day, losing as much as 11% of its value before a rally to close the trading day. However, I was much surprised to see its performance -- now with less than a month before earnings - especially considering the revenue producing developments that have occurred over the last six months.

SODA is one of the more frustrating stocks to own. The company always appears to be growing, yet its stock cannot create any level of positive momentum. SodaStream as a company has grown incredibly fast over the last two years and continues to push forward and innovate its products. The argument against the success of SodaStream is that the company's products are a fad and will not stand the test of time. But with an automatic electric carbonation product set to release later this year, a partnership with Kraft (KFT), and with its products in over 50,000 retail stores (including 2,900 Wal-Marts (NYSE:WMT) and rising), the chances of the company continuing to grow look strong.

Back before the sell-off in late July 2011, SODA was trading near $80, but then fell during the sell-off and is yet to recover. Earlier this year from January to February, the stock rallied from $32.50 to $47.50 but then fell after a missed earnings report. This rally was fueled by earnings and the belief that SODA's earnings would exceed expectations. Therefore the majority of its rally, from $39 to $47.50, occurred in the week prior to the company's report.

In May, when the company announced earnings for the second time this year, the stock traded lower in anticipation of bad earnings. The stock dropped to $29 before the announcement and then once it beat expectations it climbed to $37. As you can see, it has been quite a rollercoaster ride for investors of SODA. Meanwhile, the company continues to grow by an impressive margin, despite its stock performance.

At Tuesday's close of $38.21 the stock is well positioned for volatility. It has traded higher by 8% over the last month, and is well above its three month range between $30 and $36. The stock is trading with a forward P/E ratio of just 14.08, and a price/sales of 2.56. Therefore I believe that as a long-term investment, SODA will return large gains, with a number of catalysts that suggest long-term growth. However, the big question is what happens in the month leading up to earnings?

In March, SODA traded higher before earnings and then fell after earnings were announced, and in May it traded lower before and then higher after the report. In my opinion, it looks as though the stock is positioned to exceed expectations with the recent growth in distribution points and with an intangible assets ratio of 12%, which usually indicates organic growth. If it can maintain current levels, then it may provide a pleasant surprise for those who hold into earnings. But because of its last two quarters, and the level of separation between the opinions of investors, I wouldn't be surprised to see more days like Tuesday, where it moves by large degrees with little or no news as the company approaches its earnings announcement.

The bottom line is that SODA is a risky investment, it's unpredictable, and can change directions without any news to validate its movement. Everyone knows that Wal-Mart is the largest retailer; therefore SODA's entry into 2,900 of Wal-Mart's stores should improve sales. And the Kraft partnership should provide more options for those who currently own SodaStream products, along with its electronic product, which provide some sense of excitement among shareholders.

Therefore, the next several months do look promising, as I doubt SODA will trade with a P/E ratio of 14 considering its growth over the next year. But if you are looking for short-term gains, then you'd have better luck playing a game of roulette. Because this stock's behavior is hard to predict. With earnings approaching, you can bet that it will be more volatile than ever.

Disclosure: I am long SODA.