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What To Buy as These 3 Companies Surge

Friday - 5/17/2013, 2:59pm  ET

When a stock surges to impossible heights in a short amount of time, investors get excited, and rightfully so. What investor would not want to hold stocks that doubled, the way Netflix did went it rose 223% in a one year period? Three companies that rose sharply in May are SodaStream, Tesla, and SolarCity. Their recent rise is illustrated in the chart below:

SODA data by YCharts

Home-made soft drinks 

In the beverage business, SodaStream traded sharply higher, after trending at around $50 for most of 2015. SodaStream closed at around $64.08 after reporting quarterly earnings of $0.68 per share on revenue of $117.6 million, which exceeded analyst expectations. The company then proceeded to raise its revenue guidance. On its conference call, the company highlighted its consumables sales growth of 109% and sales increasing 93%, both in the U.S. region.

SodaStream has a product that lets consumers conveniently carbonate and flavor their water. The product is on an growth phase that is accelerating. SodaStream expanded to Walmart and Target during the first quarter.

In 2013, the company forecasts EBITDA growth of 36%. To ensure products remain ahead of the competition, SodaStream is innovating in a number of ways. The product is being made easier to use, while its automatic Revolution soda maker is expanding distribution in all of its markets.

New age automotive sector also rises

In the electric car business, Tesla Motors is up 146% in 2013 and up 50% in the last 5 days. Tesla is scheduled to make an announcement about its Supercharger Network on the week of May 20, 2013. Tesla reported quarterly earnings of $0.12 on revenue of $562 million. The results beat estimates easily on May 8, and it sparked a short-squeeze for shares. There are 74.53 million shares short, which represents a short float of 36.90%.

During its conference call, the company said more than 5,000 units of the Model S were produced during the quarter. The high production boosted efficiency, improved gross margins to 17%, and is helping Tesla possibly exceed its 20,000 vehicle delivery goal.

Solar energy in the sunlight once again

In the solar energy space, SolarCity is up around 29% in the last 3 months. The company was analyzed favorably on The Motley Fool on January 16, 2013 when shares were around $15.50. SolarCity is now around $31.44, helped by a quarterly report that beat on revenue estimates. The company lost $0.41 per share on sales of $30 million. 46 megawatts were deployed, up 12% from last year. In 2013, the company will deploy 250 megawatts.

On its conference call, SolarCity noted the increase in operating expenses to $34.5 million, due primarily from the cost of acquiring customers. On the balance sheet, the customer acquisition is counted as an operating lease asset, whose lease duration is typically 20 years.

Contrary to the positive market sentiment, analysts at two firms downgraded SolarCity. Credit Suisse and Roth cited rising costs, a high share price return relative to the IPO price, and revenue guidance below analyst consensus as reasons for the downgrade.

Valuation

NAME

MKT CAP

AVG VOL

PRICE/SALES

EBITDA

Tesla Motors, Inc.

9.59B

2,351,440

10.7

-268.59M

SolarCity Corporation

2.37B

612,884

20.98

-47.85M

SodaStream International Ltd.

1.33B

967,569

2.54

58.08M

Source: Yahoo Finance

Tesla and SolarCity are early-phase companies. Sales have not yet reached a high enough value to offset the double digit price/sales values. Tesla has a price to sales of 10.7, while SolarCity’s price to sales is 21.

Conclusion

The three companies all show what happens when investors have excessive excitement for their future. Tesla, SolarCity, and SodaStream could all keep going up, ignoring all valuation metrics that imply that they are expensive. It looks as though Tesla could move either way in the short-term, as short-covering continues, but the continued rally after a secondary share offering suggests otherwise. In fact, in an S-3 filing, Tesla announced a $450 million convert bond offering and a 2.7 million share common stock offering. What caught bears off-guard was that Elon Musk, Tesla’s Chief Executive Officer and cofounder, said he would buy $100 million worth of Tesla stock.

Investors might take profits in SolarCity in the near term, but the glut in the solar industry is slowly being resolved. Shares recovered nearly all of the recent declines and traded at around $35. Since getting credit is getting easier still, its partnership with Goldman Sachs to offer more than $500 million in lease financing virtually assures strong sales for SolarCity.

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