Seven lessons from one of the best stocks in history

In August 2009, I travelled three hours north from Ayr to Fort William in the Scottish Highlands with my father and brother. Our mission? To watch the mountain biking world championships.

Apart from the racing itself, one of my abiding memories is that there were energy drink endorsements everywhere. Red Bull, Monster, Relentless, and Rockstar. Free caps. Free cans. Free t-shirts. Side events happening all over town, all sponsored by a different brand.

I didn’t know anything about investing or Peter Lynch at the time. I was only 12. But if I did, I might have checked to see if any of these companies were publicly traded. If I had, I would have found that I could buy shares in Hansen Natural, the predecessor to Monster Beverage.

Monster’s long-term share price performance is staggering.

It is up 18 times since my visit to Fort William and is right up there with the best individual US stocks in recent history. I can’t beat my 12-year old self up for missing out, but I think there are plenty of lessons to be taken from its rise.

1. Earnings move stocks

In the short-term, stock prices are moved by noise, sentiment and expectations of what is coming next. In the long-run, they are moved by the evolution of a company’s earning power. The 18 times (split adjusted) rise in Monster’s share price since 2009 reflects the 17 times increase in its earnings per share.

2. Industry tailwinds help (but aren’t essential)

Monster’s sevenfold growth in revenue since 2008 and stupendous growth since 2004 is mostly down to surging demand for energy drinks in that time. Monster sells worldwide, but data on this product category’s growth in the US gives you a sense of direction.

A research paper by M.A. Heckman and co in 2010 included an estimate from Datamonitor that US energy drink sales totaled $4.8 billion in 2008. Estimates I’ve seen for its size in 2023 vary around the $20 billion mark, or more than four times bigger.

The recipe of Monster’s success is simple but not easy: it managed to establish and expand a strong early position in a fast-growing market niche that turned out to be absolutely huge.

A lot of ultra-successful growth investments follow a similar path: Netflix, Microsoft and Nvidia to name just three. The hard bit is working out who is going to win (or at least take a big share of) the category while it is still young. And, indeed, if the category is going to be a huge market.

It’s also worth noting that declining industries (or ones that are perceived to be declining) can also facilitate incredible stock returns as capital flees the sector. Look no further than my colleague Shani’s explanation of Philip Morris’s incredible run here.

3. Great businesses find the next leg of growth

In a financial context, the law of large numbers dictates that it is hard for a business or industry to maintain high growth rates for a long time.

This is because the growth in dollars needed to maintain that growth rate gets bigger, and bigger, and bigger. For example, a company goes from dreaming of hitting $100m in revenue one day to a point where $100m in extra revenue doesn’t even represent 5% growth.

In 2013, Monster recorded its first sub-10% year of revenue growth since 2000. Great companies, though, find ways to fight this by unlocking new levers of growth. Different chapters of the story, if you like.

Microsoft went from selling Windows and Office on perpetual licenses to software-as-a-service and the cloud. Nvidia went from selling GPUs for gaming computers to GPUs that power the use of AI models. On August 14 2014, Monster made the following announcement:

The Coca-Cola Company and Monster Beverage Corporation Enter into Long-Term Strategic Partnership
The Coca-Cola Company to Purchase 16.7% Equity Stake in Monster
The Coca-Cola Company to Contribute its Energy Portfolio to Monster, and Monster its Non-Energy Portfolio to The Coca-Cola Company
Monster to Become The Coca-Cola Company's Exclusive Energy Play
Focuses Monster as a Pure Play Global Energy Company
The Coca-Cola Company System to Expand Monster Distribution in U.S. and Canada and become Monster's Preferred Global Distribution Partner

4. Distribution is king

The Coke deal has been a slam dunk for Monster. Not only did it gain access to Coke’s huge and highly entrenched network of bottlers and distributing clout worldwide.

One sentence of the press release above, “Monster to Become The Coca-Cola Company's Exclusive Energy Play”, signalled the end of a major competitive worry. This photo I took at my local golf course the other day sums up the power of that benefit nicely:

Why would a venue wanting to sell soft drinks not stock Coke? And if they do, why juggle multiple suppliers when they can get Powerade, Monster and co from the same place? Especially if they are throwing in a fridge for good measure.

By becoming Coke’s “exclusive energy play”, Monster broke its way into the fridge and joined the dream team. In a league where there is, quite often, no competition.

Since the Coke partnership was announced in 2014, Monster’s annual revenue has risen from around $2.5 billion to over $7 billion. Earnings per share have gone from under 50 cents in the previous full year to over $1.50 per share in 2023. A profitable next chapter indeed.

5. Look for intelligent founders and CEOs aligned with shareholders

Monster’s decision to partner with Coke was clearly a masterstroke – one that exhibited deep industry knowledge on behalf of Monster’s management and, most importantly, their preference for building long-term value over juicing the next set of results.

By 2014, Monster had clearly beaten the pants off Coke’s offerings in the energy drink space in the US market. All they really had to worry about was Red Bull. In this situation, Monster could have dismissed Coke or been too proud to accept their investment.

But management did neither of these things. And I am guessing this was because decades in the industry had left them aware that Coke’s distribution power could still have a big say in the long-term value of Monster’s business. It could be a perennial looming threat or it could become an opportunity.

There were some short-term trade-offs to the deal, too. Cranking up Monster’s utilisation of Coke’s distribution system and various bottlers would take time, effort and up-front expenses like the $224 million (or almost 10% of revenue) Monster had to pay in contract termination costs in FY 2015.

Thankfully for Monster shareholders, neither CEO Rodney Sacks or CFO and President Hilton Schlosberg were reliant on bonuses and short-term results for their wealth. After all, they had led the buy-out of Hansen in 1990 and still held a combined 13% of the shares before the Coke deal.

In other words, most of their net worth was linked to the long-term value of Monster’s business. Having introduced energy drinks to Hansen’s line up in 1997 and overseen Monster’s rise to the top of the US energy drink category, they also clearly knew what they were doing.

This combination – an owner operator with a strong track record in the industry – features heavily in pretty much any list of top-returning stocks over the long-run.

Obviously there is some survivorship bias there: these stocks wouldn’t be on any list of top performers if the founders hadn’t crafted a strong track record. But you don’t need to invest in huge winners like this at the very start to get a very good return.

In many cases, the operators will already have a solid track record in place by the time you find them.

6. Markets pull growth forward, tempting investors into costly decisions

Monster shares doubled in the year following the announcement of its Coke deal and remained around that level for another 2 years. This is typical of how markets react to big announcements: excitement pulls growth forward and can bring weaker share price returns as the business grows into the valuation.

Investors know this and can be shaken out of their holdings after a short-term bump in share price. They can sense that the valuation has become stretched and they become scared of losing what they have gained in the recent months or years.

I often struggle with this myself. What I try to remind myself in situations like this is that selling can often be a big mistake in the long-run, even if you are right in predicting a rough patch in the near future.

For example, who could have blamed an investor for selling Monster in December 2014, with its share price up 60% in just 4 months following the Coke deal and its P/E at almost 43 times? Well, the shares are almost 3 times higher today than they were then.

The S&P 500 index has recorded a similar return over that time, but the sale of shares would potentially have attracted capital gains tax and other costs reducing how much the investor would have to reinvest. And who’s to say the next investment would have been anywhere near as good?

7. Every individual stock will be a bumpy ride

I started this article by saying that changes in earning power will ultimately drive the value of a company in the long term. In the short-term, though, stock prices can wobble around – often rather violently – on anything from market or sector sentiment to changing expectations over what might come next.

As a result, there is not a single stock on earth that won’t experience severe volatility at some stage over the course of a 15 or 20 year holding period. Look at any huge long-term winner’s chart and you will see a host of painful drawdowns along the way. It is just the nature of holding individual shares.

Having the stomach to hold on and actually realise the long-term gain achieved by huge winners like Monster is extremely hard. So hard that few investors manage to do it, even if they held the stock for some of the journey.

One way to make it easier might be to focus yourself purely on the long-term destination of the business rather than trying to game the stock’s next move. I talked about this a bit in my article about Nick Sleep’s investing letters.

What is your approach to investing?

Remember that individual stocks should only be considered as part of a broader investing strategy. Read this article by Mark LaMonica for a four step guide to creating yours.