This Giant's Smart Move Could Be a Trap for Investors

Editor's note: Being right doesn't guarantee you'll make money in the markets. Today, Joel Litman – chief investment strategist at Altimetry – covers one stock that looks like a great opportunity. But, as he explains, one critical detail means investors should think twice before jumping in...

A once-in-a-generation consumer shift is taking place...

And it's probably not what you're thinking of.

The COVID-19 pandemic did a lot to encourage conversations about health and wellness. Folks were stuck isolating at home to avoid a dangerous virus. With little else to do, home workouts surged.

That focus on health hasn't gone anywhere as the world reopens. The trend has boosted the health and fitness industry. And it led to another winner in an unexpected place...

Nonalcoholic beer took off during the pandemic. The industry is still expanding today... Sales were up 21% year over year as of August, reaching $395 million. These beverages make up 0.47% of total alcohol sales this year, compared with 0.26% in 2019.

Alcohol-free beer is finally not just for people who want to quit drinking. Folks are paying more attention to what they're consuming. And new nonalcoholic beverage brands are cropping up all over the place.

Even popular coffee and soda giant Keurig Dr. Pepper (KDP) is taking notice...

The company recently invested $50 million into Athletic Brewing, a big player in the nonalcoholic-beer space. But despite this popular trend, investors considering Keurig today might be missing the mark...

Keurig got its start in the coffee business. It made and distributed goods related to coffee systems, such as brewers, "K-Cup" pods, and specialty coffee.

In 2018, it got into the soda game when it bought Dr. Pepper Snapple. It never waded into hard alcohol... though its recent acquisition is helping get its foot in the door.

This is a smart move. Because there's no alcohol, Keurig isn't taking on any new regulatory risk. And it's still getting exposure to a growing segment.

That doesn't make Keurig a good investment today, though.

The market already has high hopes for the beverage giant...

We can see this using our Embedded Expectations Analysis ("EEA") framework at Altimetry. It uses Uniform Accounting – which removes the distortions in traditional accounting numbers – to see how investors think a company will perform based on the current stock price.

Keurig is already a massively profitable business. Its Uniform return on assets ("ROA") has been 70% or above for the past three years. Still, investors expect more.

The company trades for about $38 per share today. At those prices, our EEA tells us the market expects Keurig Dr. Pepper's Uniform ROA to surge to 87%. Analysts expect similar performance, with profitability jumping to 88% in 2023.

Take a look...

That's a big jump... especially from a company whose products are still fairly niche.

Investors have already caught on to Keurig's potential...

The company has a good opportunity to grow into the nonalcoholic-beer business and improve its returns. However, the market already knows this. It's expecting a lot from an already extremely profitable company.

This goes to show that businesses with a lot of potential aren't always smart investments.

Investors should be wary of putting their money into opportunities like Keurig. With such high market expectations, the company has a lot more to lose than it has to gain. Any disappointing news could hurt investors' outlook on the stock.


Joel Litman

Editor's note: Joel says one "hidden" factor can help you find the areas of the market setting up for big gains... and avoid the ones poised for disaster. This is one of the most important drivers of a stock's performance. But you might not know exactly how crucial it is – especially as we close the door on a volatile 2022. That's why Joel just released a simple tool to help investors size up these opportunities... Get the details here.

Further Reading

Investor expectations can tell us a lot about an asset's upside potential. Right now, the market is underestimating one company. This giant got unfairly crushed this year – and interest from one sector could soon turn the tables... Learn more here.

The "at-home revolution" led to a Big Tech boom and bust. But the world's "new normal" is only one reason why this sector has crashed... Learn more here: The Dot-Com Bubble Might Be Repeating Itself... With Different Players.