Even great companies can see their stock prices sink on short-term factors and negative headlines.

If you want to outperform the market, then you have to be ready to avoid these near-term catalysts, take profits and wait to take advantage of lower prices down the road.

I warned investors in late 2013 that one such company could be hit by the outcry for higher wages despite a strong business model and an excellent brand. Within a month of the article, shares were 20% lower. Since then, however, the share price has jumped 45% in about 18 months.

Now that very same stock could be facing near-term catalysts to the downside. Another plunge in the shares could offer another great buying opportunity or it could wipe out all of your returns if you don’t take profits beforehand.

This Company Is Juiced For Profits
Jamba, Inc. (Nasdaq: JMBA), based in California, is the top retailer of the growing freshly-squeezed juice and smoothie market, with 100 million annual visitors to its 862 Jamba Juice stores.

The company rolled out four grocery products to 300 stores in California through the last quarter of 2014 and plans on a national rollout this year. The expansion to retail could really help Jamba increase its market and diversify revenue.

Besides the rollout of grocery products, the company is progressing with its refranchising initiative and plans to have 80% of stores franchise-owned by the end of 2015. This allows Jamba Juice to cut corporate overhead and focus on growth and development of the brand.

The company plans on doubling the number of U.S. stores with 500 new locations over the next five years. Jamba is also planning an aggressive international expansion with 200 new stores over the next four years.

Despite these growth plans, JMBA shares are poised to take another share price hit from two near-term catalysts.

The Two Plagues
California has entered into its fourth year of drought and the State Water Board has passed the State’s first-ever mandatory conservation law. From June through next February, every city and district with more than 3,000 connections will be required to conserve between 8% and 36% of their prior consumption.

While the law does not affect agriculture, which uses 80% of the state’s water, the severe drought is hitting crop production as well. This may drastically affect Jamba, which could see a fruit shortage or much higher costs.

The state produces 34% of the nation’s citrus crop, behind only Florida, which accounts for 63% of supply. California grows 90% of the country’s grapes as well as most of our lemon (92%) and tangerine (80%) supply.

The [California] State Water Resource Control Board expects to start issuing curtailment orders to agricultural producers in a matter of weeks. Agriculture provides $40 billion a year to the state’s economy and a hit to farming could flow through to consumers as well.

Jamba Juice buys its fruit based on short-term seasonal pricing agreements. The firm sources some fruit internationally to protect from price volatility, but the contracts include a force majeure clause that can lead to significant increases. It happened in 2007 with the late season freeze in Florida and is a constant threat to profitability.

As if environmental problems were not enough, the company could see higher prices from another threat as well.

The nation’s orange crop has taken a $4 billion hit over the last year, and this year’s crops are expected to produce the worst harvest in more than two decades. The cause: a bacteria, called huanglongbing, is infecting citrus trees and causing them to die. It also attacks limes, lemons and grapefruits.

Michael Rogers, interim director of the Citrus Research and Education Center at the University of Florida, says that the majority of citrus trees in Florida may already have the disease, for which there is no cure. Another bug in Hawaii and California, the Brown Apple Moth, is damaging crops of avocado, grapes and raspberries.

#-ad_banner-#The Animal and Plant Health Inspection Service (APHIS) estimates that invasive pests cost the United States $120 billion a year in damaged agriculture.

Jamba does not break out its costs, but its gross margin has declined for two consecutive years to 19.9% from 22.9% in 2012. Margins may take a further hit on higher citrus prices over the next year.

The company reported losses in each of the last two quarters and may miss estimates for $0.42 per share earnings this year, making the 38-times forward earnings multiple look even more overvalued.

I still like the company’s long-term outlook, especially on its franchising and new product initiatives, but investors may want to take profits and wait for a better entry. Set a buy-under price of $12.60 per share (21% lower than current) on a price-earnings growth ratio of 1.5 times earnings growth of 20% over the next five years.

Risks To Consider: The company has a strong long-term outlook on its brand and popularity of the juice category. Taking profits risks missing out on further upside in favor of safety from a potential decline.

Action To Take –> Take profits after a strong multi-year rally in Jamba Juice before potentially higher citrus prices derail the stock’s surge. Wait for a better entry point around $12.60 per share to take advantage of long-term upside.

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