Here’s Where Wall Street Analysts Have It All Wrong

I don’t fit in with the Wall Street crowd.

 Raised on a farm in rural Kansas, I have quite a different background than your average Wall Street hot-shot. But I’m no stranger to the scene. You see, prior to my role as Chief Investment Officer of Game-Changing Stocks, I spent many years at the business desk of one of the nation’s largest newspapers, the Newark Star-Ledger. And in my time there, I got a first-hand view of how things operate.

 Fast-forward to today, and I spend much of my time on the phone with small-company executives who are designing the next-generation fuel source… Other times I might be looking through government reports to find Pentagon technology that could eventually be used to make life-changing new products.

 The majority of Wall Street analysts simply don’t do research like this. Instead, they seem to enjoy sensationalizing companies that are way past their primes.

 But there’s another difference between Wall Street and me that I want to talk about today.

 While the Street likes to go bonkers over earnings reports, I don’t. I believe wholeheartedly in considering earnings reports in an organized, standardized fashion. And I’d like to share that method with you today.

#-ad_banner-#To understand what I mean, let’s look at a stock I’ve been telling my  Game-Changing Stocks readers about for a long time: SodaStream International (Nasdaq: SODA).

 For those who aren’t familiar, SodaStream is an Israeli company that makes in-home carbonation machines used to make custom-flavored sodas. The company has a razor/razor blade business model, given that it sells both the machines — which cost anywhere from $79 to $199 — as well as consumables like CO2 cartridges, flavoring and special carbonation bottles. The company’s worldwide retail footprint is in 41,000 stores in more than 40 countries.

 I first shared this company with readers in early March of 2012 as “a game-changer right in the midst of [a] ‘stodgy’ industry.” Over the next 15 months, share prices skyrocketed 117% from $35 to $75 a share in July 2013, as demonstrated in the chart below.

Now, fast-forward to a couple of months ago. Shares of Sodastream fell 26% on January 13 as the company reported earnings that fell short of expectations.

 And then came the headlines…

“SodaStream Goes Flat Again” – Motley Fool
“SodaStream Stock Crumbles On Earnings Warning” – Zacks
“SodaStream Loses Fizz As Forcasts Are Cut” – The Guardian

 Unsurprisingly, my inbox was flooded with questions about the stock.

 I’m not indifferent to sensational headlines about earnings, but I like to take a more measured approach with a wider eye toward the long term than the daily movements of a stock based on earnings, palace intrigue or whatever else is fueling short-term trade decisions.

 According to the company, revenue for 2013 was $562 million, compared with previous forecasts of $567 million. Wall Street was looking for $567.2 million. This is off by about 1%. I consider that close enough.

 Remember, this was one of the most challenging Christmas shopping seasons in memory. Consumers would not open their wallets unless the deal was too good to pass up. In this difficult environment, SodaStream was so attuned to its distribution channel that it was able to forecast revenue to within a single percentage point. I don’t know about you, but that gives me a measure of confidence in management.

 SodaStream’s net income (profit) was $41.5 million. The company’s own guidance and Wall Street’s expectation was for $54 million. This is a significant miss, about 23%. More important, it was a smidgen below the previous year’s results, when the company posted net earnings of $43.9 million. That worked out to a 2012 net margin of about 10%. In 2013, that fell to 7.4%.

 No one likes to see that. But there’s a critical caveat: Margins are going to be volatile as small companies ramp up as they seek to dominate their categories. Game-Changing Stocks investors should expect this.

 Also important to note — CEO Daniel Birnbaum’s comments were not ominous. He acknowledged the problems, explained them without simpering and moved on to what the company was doing to get back on track. What I look for in these statements is not a CEO who will parse every penny of mistake but one who is focused on the bigger picture. When a guy who can raise the top line 28% in one of the toughest retail climates in recent memory says he’s confident margins will return, I will take him at his word.

 Sure, according to Wall Street, SODA’s result was a miss.

 But it was not so egregious a miss that the company was worth 26% less than it was the day before. This is typical Wall Street myopia — intensely focused on the present, with little regard for the past in context or the possibility of the future. The future is where the upside is.

 The question is not: “Do I like this stock?”

 The proper question (and mindset) is: “Do I want to own this business?”

 In the case of SodaStream, my answer is a resounding “yes” for plenty of reasons.

 The biggest reason: SodaStream scares the hell out of Coca-Cola (NYSE: KO).

Earlier this month, Coke announced it was taking a 10% stake in Green Mountain Coffee (Nasdaq: GMCR), which created the K-cup coffee craze. The two companies also announced a partnership to develop Coke’s beverages for Keurig’s yet to be released single-serve cold drink system.

 Make no mistake: SodaStream is the driving force behind that agreement.

Coke will survive, of course. Green Mountain will show the company how to roll out at-home Coke dispensers, which Coke will nimbly push through its immensely wide sales channel, with all the marketing oomph it can muster. The only question that remains is what’s going to happen to SodaStream.

 My sense is that it will be A) either be acquired by another dominant force, like PepsiCo (NYSE: PEP), or B) that it will partner with another major player in a marketing campaign to bring other flavors — Dr Pepper (NYSE: DPS), say, and Snapple, to home users. In either case, I see it as a steady climber for the foreseeable long-term future, with more potential than the overall market.

People are buying this product. They like it. The soda tastes good. (We go through Diet Pink Grapefruit at our house like crazy.) The machine is easy to use. There are a lot of flavors available through a wide array of stores. It’s the soda equivalent of a K-cup machine. I don’t know anyone who doesn’t have a K-cup these days. I think the same will be true of SodaStream.

 Their numbers missed expectations at the bottom line, but they tell a more important story, and that is that SodaStream is gaining traction. It’s not time to panic, and it certainly isn’t time to give up the ship.

 The bottom line is if you’re ready to sell after reading headlines and before looking at the long-term picture of a company and its earnings, you’re trading rather than investing.
 And while trading has its place, I seek to invest based on my conviction about the prospects of a company to deliver results over many years, not just the past 90 days.

P.S. — I’m always looking for cutting-edge companies with triple-digit gain potential. In fact, I’ve recently identified five “game-changing” trends with the potential to revolutionize the way we live our lives — and make early investors a killing. You can see my findings in  this special report. In it, you’ll learn how one company could deliver the final blow to the “Big Three” automakers, how 3 small companies are ushering in a “2nd Industrial Revolution,” and how a tiny $650 million company could kill the gasoline engine.  Go here to read this special report.