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SODA – Ready to Explode or is the Fizz Gone?

3/10/2014

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MARKET CONDITIONS

The recent roller coaster ride of SodaStream International (SODA) has been a lot like a child who has been given too much cola at a birthday party. Dizzying highs and sudden fits of upward energy have been followed by sudden drop offs in activity and the eventual (and inevitable) crash which included a stomach churning fall from $50 to $36 at one point. The most recent traded price of $40.10 represents something of a recovery to normal levels, but the question remains: is SodaStream ready to explode or is the fizz gone from the stock? 

*** We've recommended SodaStream earlier on and hopefully you were able to participate in the initial ground-floor opportunity not to mention the awesome option plays that should have netted you a nice tidy sum. 

Unfortunately, like everything good in life... it will eventually come to an end. Hopefully, your stop losses were applied and you came out way ahead of the game. The fact that SodaStream's market segmentation is beginning to work against it doesn't mean that we can't profit from the outcome whether good or bad. 

I believe that the stock will be volatile during the Fed's quantitative easing and perhaps will be better positioned for acquisition by a major like PepsiCo. With that being said, take it easy on the option premiums.
Don't get greedy and by all means avoid slaughter. I recommend a covered call strategy, especially when it comes to the potential acquisition. Too bad they don't have any warrants for sale. ***

The Business Model
SodaStream is based on a pretty simple premise, which they themselves embrace as the “razor and razorblades” model. The phrase refers to the model pioneered by the Gillette razor blade company early in the 20th century with their disposable razors. The razor handle is the constant, and is reasonably durable with minimal need to replace it on a regular basis. The blade is the element that must be replaced regularly to ensure regular and optimum performance. In SodaStream's case the razor handle are the range of drinks makers. 

The blades in this case are the range of consumable products that SodaStream provides for sale to operate the drinks makers. These come in three broad categories. The first is the simplest and cheapest, which encompass the range of syrups that customers can buy in order to flavor their drinks. The second are the carbonators that are used to add the bubbles (fizz) to the drinks. These are sold in the form of carbon dioxide canisters and are specifically engineered to fit different sized drinks makers. The final piece of the puzzle is the bottles that the company provides in order to house the homemade brews and cocktails.

 The business model relies on a number of levers to drive customer demand, including health benefits of home made cola and drinks rather than additive and preservative laced commercial brands by industry behemoths such as Coca Cola and PepsiCo. Another differentiator is the environmental impact of the company, which proudly displays that they have saved the Earth from over 3 billion bottles going to landfill on their site. A final differentiator is the long held and time honored tradition of the celebrity endorsement, with the brand recently bringing Scarlett Johansson on board as their inaugural global brand ambassador.

The Financial Metrics 
Despite the newly added star power of one of Hollywood’s most recognizable faces, the most recent earnings figures disclosed in early January did not impress the stock market. This was the catalyst for heavy selling of the stock, which saw the rapid fall from a strongly supported $50 to much lower $35 levels. The top-line revenue figure was a strong point, with incoming earnings of $562 million for the fiscal year ending 31 December 2013. However, despite the record sales figures, several factors contributed to the bottom-line earnings disappointing and falling well short of market expectations at $41.5 million.

The company highlighted that a extremely competitive holiday season in the United States with strong competition was a strong drag on performance. This is particularly so for a retail exposed company such as SodaStream (SODA) which draws a disproportionate amount of it’s earnings from the final quarter of the year. They also identified higher costs in providing their product coupled with lower prices on the shelf able to be charged as a result of heavy discounting, resulting in a margin squeeze from both sides of the equation. A final excuse was the adverse effects of foreign exchange rates, as the US dollar recovers from historic lows. Worryingly, these factors are not one off events, and are likely to represent continuing headwinds in the coming year.

The Investment Case 
Retail is a tough landscape to play in these days, with the rise of online shop fronts, heavy competition and lower cost production and substitution. However, those companies that sell non-discretionary consumables are somewhat insulated from these forces. SodaStream sits somewhere in the middle, with soda an everyday item, but SodaStream’s products on the premium end of that scale.

Going forward, the companies success depends on leveraging strong brand awareness to drive sales of it’s drinks makers, and therefore create repeat business for it’s lower margin syrup and carbonation products. The company could draw on a page from the N’espresso playbook, which has been hailed as the best brand reinvention in a decade, creating a premium brand around the most everyday drink, coffee with effective branding. They also need to invest in new products to increase interest and curiosity in their consumers and complement their existing trademarked brands which include SodaStream, Soda-Club, Aquafizz and AlcoJet among others. Effective marketing strategies could also center around the environmental benefits of using the system as well as the health and cost advantages, all themes that are likely to play well in their major developed markets. Partnership with large brands helps deliver this message, as the recent tie-up with Samsung demonstrates, but it could take the attention of a truly global player to deliver these strategies, which is why it is rumored that drinks giant PepsiCo is considering buying the company.

Conclusion 
SodaStream (SODA) is a differentiated product in the extremely competitive consumer goods and brands space. Addressing their contracting margins and increasing sales globally to offset heavy reliance on the US market are a priority for the company, and it remains to be seen whether they can do this on their own, or whether they will need the partnership or ownership of a larger player to deliver on these strategies.
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BAC Option Brief

3/9/2014

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MARKET CONDITIONS


PROFILED:
 Bank of America Corp (NYSE:BAC) 

Bank of America Corp (NYSE:BAC) is seeing accelerated option activity on both the call and the put side today, with volume running at a 5% and 22% mark-up to average intra-day levels, respectively. The two most active strikes expire at Friday's close, and it seems a number of speculators are split on the stock's short-term trajectory.

The most sought-after position heading into the final hour or so of the session is BAC's weekly 3/7 16.50-strike call, where a healthy portion of the 19,400 contracts traded have changed hands on the ask side. Implied volatility (IV) has jumped 6.8 percentage points, hinting at buy-to-open activity. Delta for this out-of-the-money call is docked at 0.32, suggesting a 32% chance of an in-the-money (ITM) finish at week's end -- when the options expire.

Meanwhile, the weekly 3/7 16-strike put has also garnered notable attention. Specifically, 83% of the 14,366 contracts traded here have done so at the ask price, and IV is up 5.7 percentage points, indicating the initiation of new bearish positions. The options market isn't too confident this put will be ITM at Friday's close, as delta is perched at negative 0.24.

On the charts, BAC has spent most of 2014 bouncing between the $16 and $17 levels, translating into a modest year-to-date advance of about 5%. However, a large portion of option traders have been focusing on the aforementioned options, as peak call and put open interest in the weekly 3/7 series can be found at the 16.50 and 16 strikes, respectively. In today's session, Bank of America Corp (NYSE:BAC) has succumbed to the broad-market sell-off, and was last seen 1.2% lower at $16.32.

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On To The Numbers!

3/9/2014

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MARKET CONDITIONS


The Dow Jones Industrial Average (INDEXDJX:.DJI) is pointed lower this morning, as rising geopolitical tensions between Russia and Ukraine cast a dark shadow on the day. Back on the homefront, investors will have their hands full digesting weekly jobless claims, the latest durable goods number, and Federal Reserve Chief Janet Yellen's testimony in front of the Senate Banking Committee. The head of the central bank is heading back to the Hill for her second appearance in front of Congress after her initial testimony was previously delayed due to inclement weather.

Meanwhile, taking a quick look at the charts, Schaeffer's Senior Trading Analyst Bryan Sapp notes, "The same levels are in play from earlier this week -- specifically, 1,850 on the S&P 500 Index (SPX) and 1,180 on the Russell 2000 Index (RUT). Each has briefly spiked above these key areas, but every rally has been unsustainable. The recent range in the market has likely frustrated both bulls and bears, as there has been no directional lean and very choppy intraday price action." 
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Futures on the Dow Jones Industrial Average 2 Minute (INDEXDJX:.DJI) are about 52 points below breakeven.

Market Statistics
The Chicago Board Options Exchange (CBOE) saw 1,313,950 call contracts traded on Wednesday, compared to 755,043 put contracts. The resultant single-session put/call ratio remained at 0.57, while the 21-day moving average arrived at 0.60.
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From the Trading Floor
"The new Investors Intelligence poll surfaced yesterday, and we saw a pretty substantial increase in bulls," continued Sapp. "While this spike represents a one-month high in the reading, we're still below levels seen in December. The amount by which this poll has jumped around in recent weeks shows just how bipolar market participants have been lately. We're seeing many knee-jerk reactions in sentiment, and this leads me to believe that a break of the recent range will lead to an outsized move in stocks once the market shows its hand."

Currencies and Commodities
  • The U.S. dollar index is flirting with a 0.1% lead ahead of the bell, with the currency last seen at 80.49.
  • Elsewhere, crude oil is looking to pare a portion of yesterday's gains, with crude for April delivery down 0.2% at $102.42 per barrel.
  • Gold futures, meanwhile, are on pace to resume their recent uptrend, with the front-month contract 0.4% higher to linger near $1,332.80 an ounce.
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Earnings and Economic Data
Coming out today are durable goods orders for January and weekly jobless claims. In addition, newly minted Fed chief Janet Yellen will testify before the Senate. Stepping up to the earnings plate are AMC Networks (AMCX), Arena Pharmaceuticals (ARNA), Best Buy (BBY), Chico's FAS (CHS), Chiquita Brands (CQB), Clean Energy Fuels (CLNE), Deckers Outdoor (DECK), Gap Inc. (GPS), Halozyme Therapeutics (HALO), Kohl's (KSS), Linn Energy (LINE), Monster Beverage (MNST), OmniVision (OVTI), Salesforce.com (CRM), Sears Holdings (SHLD), Sotheby's (BID), Splunk (SPLK), and Wendy's (WEN).
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Two Ways To Trade Puts

3/9/2014

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MARKET CONDITIONS


PROFILED:
Walgreens (WAG)

Put players from both the long and the short side of the aisle have been increasing their presence in Walgreen Company's (NYSE:WAG) options pits of late, per data from the International Securities Exchange (ISE), Chicago Board Options Exchange (CBOE), and NASDAQ OMX PHLX (PHLX). 

On the long side, speculators at the ISE and CBOE have bought to open 4,670 puts on WAG during the past five sessions, compared to just 464 calls, resulting in a put/call volume ratio of 10.06.

As a point of comparison, the stock's 20-day ISE/CBOE/PHLX put/call volume ratio stands at 0.38, meaning roughly five calls have been bought to open for every two puts over the last month. In particular, a number of put buyers have targeted WAG's March 65 strike in recent sessions -- buying to open more than 1,700 contracts here since last Wednesday. 


In other words, the stock needs to drop 2.5% from its current perch by the close on Friday, March 21, when front-month options expire, in order for these puts to move into the money.

Meanwhile, on the short side, traders at the ISE, CBOE, and PHLX have sold to open 1.66 puts for each one they've purchased throughout the previous 50 sessions, and a large portion of these put writers have targeted the April 52.50 strike. 


This deep out-of-the-money strike is the site of peak put open interest in the front three-months' series of options, and since Dec. 2, more than 2,200 short contracts have been initiated here.

By writing the puts, the speculators anticipate the $52.50 level -- home to WAG's 50-week moving average -- will hold as support through the close on Thursday, April 17, which is when the back-month options expire. In this best-case scenario, the puts will finish worthless, and the traders will retain the initial net credit as their full potential reward.

On the charts, WAG hasn't traded south of $52.50 since Sept. 12. In fact, since hitting its intraday low of $50.88 that day, the stock has tacked on more than 30%. In light of this upward momentum, the recent crop of put buyers may be initiating trades at out-of-the-money strikes to guard against a potential pullback. 


Considering the equity's Relative Strength Index (RSI) of 71 is sitting in overbought territory, a near-term consolidation isn't out of the question. This scenario is playing itself out in today's session, with the shares off 0.5% at last check to trade at $66.64.

On the fundamental front, Walgreen Company (NYSE:WAG) will release its February sales numbers one week from today. Additionally, the drugstore chain is slated to unveil its fiscal second-quarter earnings report before the market opens on Tuesday, March 25.

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Intrexon – The Next Great Biotechnology Success Story?

3/9/2014

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MARKET CONDITIONS

PROFILED: Intrexon (XON)

There are many qualities that make up a successful company, and contrary to popular belief, there is no magical cocktail of factors that every world leader must tick to climb to the top of its field. For example, the success of Apple Inc. is driven by a culture driven by researching, designing, developing, testing and marketing products that create markets that previously didn't exist, that at the same time creating a strong desire from individuals worldwide to own them. 

That’s exactly what it did with iPods, iPhones and the iPad. The iWatch may be next. The strength of Google is understanding people, and how they behave online and in the real world. By doing this they are able to collect data, analyze it, package it, and ultimately, use it to create ever-better products and services, all of which attracts customers and advertisers to their world. Finding a new company that has a clear, simple to understand business model that can be applied in a wide market is a rarity, and finding one before it attracts the attention of the stock market is even more rare.

So hopefully, this article will answer the question, is Intrexon (XON) the next great biotechnology success story and is its' most recent close price of $25.90 is an opportunity to buy before everyone else does?

The Company and Business Model
The company starts badly in answering that question. It’s clear that not every company has an easy to distill message that communicates what exactly it does, and how it makes money. But that is one of the most fundamental considerations that has to be made when assessing whether you are going to put your own money into a business as a shareholder.

Intrexon (XON) is a biotechnology company that is active in the new field of synthetic biology. That’s not a bad thing by itself. New fields mean that the market is not saturated with competitors and the pressures that they bring. It’s less good when its unclear what the field does specifically, and how it can make money.

The company itself tries to explain its activities as assisting in designing and regulating those activities that take place within a cell, by manipulating DNA. It further states that by doing so, the applications for their technology are available in the full range of occupations and fields, from energy to food production as well as healthcare and science. Their suite of products includes Cell System Informatics a “Bioinformatics” software application and UltraVector an “integrated suite of tools”.

That sounds impressive. But dig a little deeper and things start to get disturbing. The  product offerings mentioned above comprise in major parts fancy database systems. Yep. A database. That’s what is underpinning those fancy names and impressive (and definitely made-up) words like Bioinformatics. Further, if the technology did what it said it did, there would be a more focused approach to its application rather than a generic list of industries where DNA engineering could certainly have far-reaching and world-changing applications.

Financial Facts and Figures
Unfortunately the financial facts and figures disclosed at the last earnings call did nothing to change the unclear picture of the company. Expenses increased from a modest $1.1 million to almost double that amount. There was also over $1 million in charges related to stock options, a massive number when considering the size of the company, the burn rate of cash and the short trading history with no profits to back it up.

The figures are even worse for the research and development side of operations, with costs blowing out by 93% compared to the previous corresponding quarter. Even worse, most went on employee costs, with no new products or significant commercial initiatives beyond a research partnership with a University and some tentative and very early stage trials on various diseases.

The figure that should be of most concern, however, is the one that indicates just how fast the company is burning cash. In nine short months it was able to spend $4.9 million, with no discernible change in the company metrics. While that may not sound significant, it represented half of the companies total cash pile, and indicates that a capital raising or more investment will be needed from shareholders very soon to bolster a deteriorating balance sheet..

Outlook
The industry outlook for synthetic biology may well be in transformation. The ability to change the quality of foodstuffs, prevent disease and engineer better medicine all has the power to change the world, and should be taken seriously.

However, Intrexon (XON) as it currently stands does not look as though it has the strengths to deliver such lofty goals. Poor financial management, an unclear business focus and a lack of cash generating products or services all point to a company that is difficult to get enthusiastic about.

Conclusion
Finding new companies with novel business ideas and innovative approaches to solving the problems they set out to tackle is one of the most rewarding aspects of investing. Identifying these stocks has the potential to be a once in a lifetime success, like those who bought into Google or Apple early on. 

However, an investor needs to understand the business well enough to be comfortable in risking their money. A company like Intrexon (XON) could well be the next big thing, but at present it appears to leave far too many questions unanswered for the vast majority of investors. 

However, technically it looks like XON has bottomed out at $24 level and any good news would attract buyers. Therefore, prudent investors should keep eye on XON to make its move to the upside with a stop below $23.00 and target 34.00.
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