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Oh, what Green Mountain Coffee Roasters has wrought. Set aside fears of a new tech stock euphoria for a moment – we may be in the midst of a beverage bubble.

Exhibit A may be Green Mountain itself. The purveyor of single-cup Keurig brewing systems hit another 52-week high Friday. It now has a market capitalization approaching $12-billion (U.S.) on under $2-billion in annual sales, with a price-to-earnings ratio of more than 100, based on trailing earnings.

The Green Mountain story is old news, however. It's the search for the next Green Mountain that has created some truly astonishing stories.

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Let's look at SodaStream International Ltd. , a Nasdaq-traded Israeli company that makes "home beverage carbonation systems" – do-it-yourself soda pop makers. The company's shares have more than doubled since its November initial public offering, and it too is trading at its 52-week high. (Its P/E ratio is "just" 57, making it look like a relative bargain.)

One of its biggest advocates has been Jim Cramer, the hyperactive stocks commentator on the U.S. cable channel CNBC, who says the SodaStream product is similar to Green Mountain's Keurig machines in being underestimated. He and CNBC skeptic Herb Greenberg recently had an on-air taste test in which Mr. Greenberg was forced to admit he liked the taste of SodaStream beverages better than name-brand soda bought from the CNBC vending machine.

Doing the Math

The SodaStream machines clearly have ever-increasing numbers of fans, as evidenced by a 50 per cent gain in sales in the most recent fiscal year to $228-million. But the economics of the devices seem strange.

The Keurig machines seem to have solved the waste problem of people making a pot of coffee at home when just one cup will do. By contrast, soft drinks already come in either single-serve portions or large bottles. Instead, consumers are being asked to make at home what they can easily buy.

According to SodaStream's recent securities filings, a machine costs $79 to $199. Users then pay around 40 cents per litre for flavourings and about 25 cents per litre for the carbonation (which requires consumers to take canisters back to the stores for refill à lapropane).

That makes the do-it-yourself SodaStream more expensive than buying soda off the shelf in the U.S., where frequent supermarket sales yield prices for name brands like Coke and Pepsi of as little as 25 cents per can or less than $1 per two-litre bottle (with no environmental deposits, either, in most states).

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In the end, then, SodaStream seems best suited for consumers who want to pay extra for "fresh carbonation," use it primarily to make sparkling water, which is relatively unpopular in the U.S., or are so environmentally conscious they can't even bear the thought of buying and recycling cans or plastic bottles. How large a market is that?

Skeptics of pricey value stocks are often told "you just don't get it." In this case, I plead guilty: I don't understand the appeal of the product, and I don't understand the growth expectations for the stock.

Same Old, Same Old

SodaStream at least has a lengthy track record – its products have been in use in Europe for some time, and Western Europe accounts for just over 60 per cent of the company's revenue. In contrast, consider a speculative play in the U.S. over-the-counter market: Jammin' Java Corp. , a startup company affiliated with Rohan Marley, a former Ottawa Rough Rider and son of the legendary reggae star.

The stock has been unavoidable for users of Yahoo Finance, who in recent weeks have repeatedly seen an advertisement headlined "This coffee stock could soar."

It says Diedrich Coffee (ticker: DDRX) "rocketed" from 21 cents to $35 in 2009, "turn[ing]many small time investors into 'overnight' millionaires." It adds: "I've found the next DDRX."

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The ad links to a research website called the Lautner Letter, which provides a lengthy pitch for Jammin' Java. "For the past two years I've been actively searching for gourmet coffee stocks Wall Street has missed," newsletter author Marc Lautner writes, saying he's found a "diamond in the rough" in Jammin' Java. (The Marley name has given the coffee 'an instant worldwide brand," he says, that would normally cost "billions in advertising expense.").

One important distinction, however, is that Diedrich Coffee's amazing 2009 performance came in large part because it had the rights to make the "K-cups" for the Keurig system; by year's end, the company was the subject of a bidding war between Peet's Coffee and Green Mountain that drove the stock price to the stratosphere.

Jammin' Java, by contrast, is a new brand doing the same old thing: Selling gourmet beans at premium prices. (Its product is priced at nearly $15 a pound on


The company had just over $1,000 in revenue in its fiscal year ended in January; a non-exclusive, transferable licence from Rohan Marley to use the Marley name that it valued at $640,000 on its balance sheet; and continuing sales of stock at 40 cents a share under the terms of a private placement.

For this, investors are paying about $2 a share, giving Jammin' Java a $200-million market cap. (The stock traded at $6.35 earlier this month, valuing the company at more than $600-million.)

And Mr. Lautner, the research analyst who's spent so much time looking for a coffee company to recommend? The disclosure in his research report, that a shareholder of Jammin' Java paid his firm $8,500 "to cover and report on [Jammin' Java]for six months" was, as is the industry practice, buried in the fine print.

Fizzy sodas, hot coffee, bubbly and overheated stocks.

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About the Author
Business and investing reporter and columnist

A business journalist since 1994, David Milstead began writing for The Globe and Mail in 2009. During eight years at the Rocky Mountain News in Denver, Colo., he individually or jointly won nine national awards from SABEW, the Society of American Business Editors and Writers. He has also worked at the Wall Street Journal. More

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