How to Avoid the Next SodaStream (SODA)

It’s every investor’s worst nightmare: You log onto the computer to check your investments…and you see that one of your stocks has plunged that morning.

For shareholders of SodaStream International Ltd. (SODA), that became an unfortunate reality today. SODA shares plunged nearly 22% after the home beverage systems maker released poor preliminary results for the third quarter. After enjoying a meteoric rise in popularity, SodaStream systems just aren’t selling like they used to. Americans are avoiding soda in droves, and that’s taking a big bite out of business.

As such, the company expects third-quarter revenue around $125 million, well below the Street view of $154.12 million. CEO Daniel Birnbaum went so far as to admit that the firm is “very disappointed in [its] recent performance.” And it looks like Wall Street agreed with the sentiment.

For those of you who hold SODA shares, you’ll want to try to sell on a bounce. There may be some bargain hunters who are looking to buy on the dip in the next few days, and I recommend you take advantage of that. That is because even before the plunge, SODA was an F-rated sell.

As far as everyone else is concerned, there is a valuable lesson to be learned from all of this: It pays to keep a close watch on your stock’s fundamentals. The easiest way, of course, is to run your holdings through Portfolio Grader. For those of you looking to go a step farther, there is another key metric I check regularly—especially leading up to, and during, earnings season.

I’m talking about analyst earnings revisions. For those of you who have kept up with this daily blog, you know that upward revisions are an important indicator of a company’s future success. By that same token, downward revisions are a sign of uncertainty (at best), and a poor earnings report (at worst).

You see, analysts are paid to estimate a company’s earnings outlook. If an analyst makes a wrong estimate that ends up costing investors money, that analyst could be out of a job. If a number of Wall Street analysts start to move their forecasts higher, it’s a good bet that the stock will outperform expectations and deliver market-beating returns to investors since positive revisions are never made lightly.

When you look at SodaStream’s forecasted earnings for this quarter, the picture isn’t pretty. 90 days ago, the analyst community was calling for $0.78 earnings per share. Then 60 days ago, the consensus estimate slipped to $0.68 per share—nearly a 13% decrease. This did not bode well for SodaStream at the time, and it’s likely that we’ll see further downward revisions in the wake of this announcement.

So if you’d like to avoid the next SodaStream, I recommend you run your holdings through Portfolio Grader every week, and also check out the latest analyst EPS estimates. These two steps, combined with your usual due diligence, should help steer you away from problem stocks like SODA.

Sincerely,

Louis Navellier

Louis Navellier

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