SODA : Recent thoughts and possible stock manipulation

January 17, 2012

Recently, SODA inked a deal with KFT, in which SODA will begin selling carbonated versions of some of Kraft’s beverage brands, including the Crystal Light and Country Time Lemonade brands. The stock immediately spiked around 10%, probably prompted a rush of short covering, of which I am a tiny part of. I covered because when a stock with a 50% short interest releases positive news, a short squeeze is a very real possibility. Again, I am reminded that shorting stocks is very much a timing game, much more so than being long. Still, I have no complaints, having a profit of around 10% overall from my SODA short because I shorted initially in the upper $40s, despite covering one-third of my position at a loss in the $60s.

My core thesis that SODA is a faddish niche product is, I believe, intact even in the face of the recent announcement. As far as I am concerned, anyone who wants fizzy versions of Crystal Light or Country Time Lemonade can simply add the Kraft powders to soda water instead of paying SODA’s markup as a middleman. It should be noted that SODA’s machine is simply an inconvenient and laborious way of generating carbonated water, easily available cheaply in ready-made form at any supermarket. Of more concern is the fact that Costco has started distributing Sodastream machines. This was of some concern to me, since I believe that the lack of places at which to exchange SODA’s carbon dioxide canisters is a major stumbling block in their bid to reach the mass market. But as far as I can tell, Costco is simply selling the machines and not exchanging the canisters.

In addition, there are some signs that SODA is being manipulated, likely by call writers. For the past several months now, SODA has reached a peak in price in the middle of the month, shortly before options expiration Friday, and then proceeded to decline towards the end of the month, only to begin the cycle again in a new month. Academic research has suggested that stock prices tend to be pinned at a point where the total value of options contracts (both calls and puts) is the lowest, a hypothesis dubbed the Max-Pain theory. Both large and small stocks can be subject to option manipulation; the common factor is avid interest among retail investors, who tend to buy lots of call options at rich premiums for these stocks. Since the major danger in this strategy is that the stock may skyrocket, causing massive losses to call writers, stocks with poor fundamentals are reasonably good candidates for this strategy.

As the stock has now declined to near reasonable prices, I have switched to a more opportunistic mode of trading this stock, shorting highs and then covering at the end of the month.

Disclosure : I have a short position in SODA.