Let me tell you what makes this business so hard: Monster Beverage (MNST). Here's a company that is truly hitting on all cylinders with a remarkable acceleration in growth through the quarter.
Monster gave you one heck of a conference call yesterday. It started out with a quick comment about how the whole beverage category is getting better.
Then it said that the energy drink category is growing like a weed and getting stronger by the month. That means convenience stores, grocery stores, clubs stores and Wal-Mart (WMT), which was specifically called out as positive. Those sales are giving you 27% growth, which includes 28% international sales.
Plus, even better, you could argue that Monster is pulling away big-time from its biggest competitor, Red Bull. You've got a tremendous growth story that surprised everyone.
So what's the problem? First, it's not like the growth isn't recognized. The company is selling at 27x 2013 earnings. I know, I know, that's cheap compared a growth rate of 27%, but Monster is precisely the kind of company that if it trips up, you will be crushed.
Second, are energy drinks really the way of the future? What happens if some authority decides to question the notion that energy drinks should be banned because of health concerns? Isn't that a possibility? The FDA cares about supplements. What happens if it questions the category itself?
It's not like governments love these companies. Mexico just put a tax on energy beverages, and growth not only hit a wall, it was down year over year. What a natural beverage to tax heavily.
Third, what goes up can come down. Why shouldn't we think that Red Bull, losing share, goes after Monster on price? There go the numbers. Who wants to lose share? Look at the price-cutting that's gone on between Coca-Cola (KO) and Pepsi (PEP) over the years, as the two are locked in a seemingly endless battle for aisle share.
I point out all of these for one particular reason: SodaStream (SODA), Fossil (FOSL), and Green Mountain Coffee Roasters (GMCR) all hit a wall at a certain point. The short-sellers are going to go after Monster just like they went after those others, simply because it fits the product profile of an expensive brand that's not able to maintain growth.
So what happens? I want to tell you very much to buy this stock because numbers are too low, the cash is building and it's got a clear growth path. But the moment I do, I fear that the next number is weaker and the stock gets crushed.
What's the compromise path? How about the Monster September 65 calls for $10? You get tons of upside, and you cut off your downside. As the stock goes higher, you can peel off common against it.
Monster Beverage is the ideal stock-replacement story. I would do it on any pullback here, betting that we get a decline at the end of the day because of worries about Europe.
If that happens, I would pounce, but only with the method I suggest here. Everything else is way too risky.