Since the early 2000s, Monster Beverage Corporation (MNST) has been one of the greatest momentum stocks of its era. Throughout this period, the stock has rallied from pennies to over $80.00, as the energy drink gained in popularity. However, as fast as it rose, it has begun to fall, losing more than 40% of its value since June. Now, following a crazy week that resulted in a 16% loss, some are wondering if Monster Beverage will attempt to follow the lead of Green Mountain Coffee Roasters (GMCR).
The last few weeks have been a crazy period for Monster Beverage. First, there was a report that the company's energy drinks were cited in the deaths of five people in the last year. This is a report that was submitted to the FDA, which created mass selling in shares of Monster Beverage Corporation. According to the reports, victims consumed Monster drinks prior to their deaths. The connection between Monster and the deaths are prevalent enough to where an investigation is taking place; politicians are now getting involved and are asking the FDA to limit caffeine in energy drinks.
Monster Beverage was quick to address the allegations in an October 23rd press release and defend the safety of its products. The company pointed out that more than eight billion cans of Monster Energy have been consumed since 2002. The company also drew a comparison to coffee, saying its drinks have 30% less caffeine than a 16-ounce cup of house brewed coffee, and that adverse events do not necessarily mean a connection is present between Monster Energy drinks.
My takeaway is that without a proper investigation into the five unfortunate deaths, we won't know if Monster Beverage is the culprit. However, in regards to stock performance, this is an issue of perception, one negative reaction or one allegation can create a negative outlook-and once formed, it is hard to eliminate. There have already been downgrades from analysts and projected sales misses on behalf of the company, which may be enough for permanent destruction of its stock.
In some ways the situation of Monster Beverage reminds me of Green Mountain Coffee Roasters. Green Mountain was the best stock in the industry for a period of seven years before its free-fall. Much like Monster Beverage, its fall was a result of perception, concerns regarding patents, k-cup supply, and future growth. In fact, one might conclude that Monster Beverage is facing a more serious situation. If the FDA finds there was a connection between the company's beverages and the deaths of five individuals then company-changing regulations may be put into effect, or perhaps even a ban on the drink until the company makes changes to the ingredients.
It's hard to say for sure what will happen next with Monster Beverage. I am curious to see the results from the investigation, and the route taken by the FDA. Most likely, Monster Beverage will try to downsize the relevance, but in fact, it could have a long-lasting effect. Therefore, I will look for significant loss in shares of Monster, and believe it needs to start making changes, and perhaps follow the lead of other beverage companies to ensure survival and create investor support.
All the way up till July Green Mountain was in a free-fall. In less than a year the stock fell from $110.00 to $17.00 and had all the signs of a stock that could fall further. However, following a new found focus on healthier alternatives, new partnerships, and an ice-brewed line-up of k-cups, the stock has found support, and even some gains. Even Starbucks has seen a decline, but is seeing signs of support as it places an emphasis on healthier alternatives to attract a more health-conscious consumer base.
In the last year we've seen most beverage companies transition to include all-natural ingredients into their beverages to both maintain market share and meet the demand of consumers. One change has been with all-natural stevia (a sweetener being grown in California's agricultural-rich Central Valley), which is 300 times sweeter than sugar. It is the fastest growing commodity in the alternative sweetening sector, has zero calories, is safe for diabetics, and does not cause tooth decay.
Over the last year other leading beverage companies have been rapidly switching to stevia as a replacement for sugar. And although Monster Beverage may need to incorporate this alternative into the bulk of its products, the company is perfectly positioned for the transition due to its Blue Sky Zero soda and Blue Energy drink line of stevia based products. As a result, this is one transition that could occur fairly easy and could create optimism among shareholders, similar to how Green Mountain's focus on healthy alternatives created upside in its shares.
The only real problem for this transition is with stevia supply. As of now it is harvested in Central Valley, California, due to its strong climate for agriculture. In the past stevia has been grown in other countries, increasing the price to use the sweetener in everyday drinks. But now the stevia leader in distribution, PureCircle, has teamed with S&W Seed (SANW) to harvest and produce the product.
Over the last few years, S&W Seed has consistently increased its acreage used to harvest stevia, from 85 acres, to 118 acres this year, to an expected 250 acres next year. This shows the rate at which stevia is growing, but also shows the limited acreage at the disposal of S&W. The company harvests other products besides stevia; however, stevia production contributed mightily to the company's near 400% increase in revenue over the last year.
The truth is that if these changes continue to occur in the quest for healthy alternatives, S&W cannot meet the demand. A good under-the-radar play on this growing space is Stevia First Corp (OTC:STVF). I understand that it's an OTC stock, and with it a larger exposure to risk. However, the company has more than 1,000 acres in the heart of Central Valley and a new fermentation-based process to consistently produce the sweet steviol glycoside, rebaudioside A, which is the sweetest part of stevia. The company can now produce stevia at 300-400 times sweeter than sugar. This allows for a great opportunity. And the business strategy of Stevia First is much different than S&W Seed; according to the company website, Stevia First looks to be the "first of its kind" vertically integrated stevia business in North America. Meaning that the company will be developing a high yield stevia plant, growing, processing, and delivering a table ready product. The link above gives a nice pictorial account of the various stages in progress. It has the acreage, presence, and the technology to produce with higher profits and a cheaper rate for companies, such as Monster, that will most likely be looking to replace sugar with all-natural ingredients, such as stevia.
The way I see it, Monster Beverage doesn't really have a choice but to follow the lead of its Blue zero calorie line and substitute questionable ingredients with all-natural alternatives. In the past, companies such as Green Mountain and Monster were high-flyers in the market by providing great products that were new and innovative. However, the competitive landscape has become too great, and companies that are successfully capitalizing on healthier alternatives are growing. I am not saying that Monster must make this transition in order to survive, but if it wants to continue growing and remain relevant in the industry, then this is a change that almost must occur.