Use access key #2 to skip to page content.

February 2014



Pencils IRA Purchase: (STMP)

February 23, 2014 – Comments (1) | RELATED TICKERS: STMP , AMZN , EBAY

The Pencils IRA Project is dedicated to building a portfolio of promising businesses that can be followed and replicated by both young and new IRA investors. Each holding of the Pencils IRA Project must meet the five pillars of a "megagrower" business -- purpose-driven business, innovative products, visionary leadership, increasing cash flow production, and strong company culture -- with significant potential to create stakeholder value and substantially beat the market over the long haul. 

It is never too early to open an IRA and begin investing for retirement. Any money young adults add to an IRA should be money that will not be needed in the next 5, 10, or 20 years. While there are certain select circumstances where IRA funds can be withdrawn before retirement without consequences, it is best to treat IRAs as a very long-term minded investment vehicle. This is what makes IRAs especially helpful investment vehicles for teens and young adults who have many years before they will hit retirement age.

Last month I added (STMP) -- a leading provider of online postage and shipping solutions -- to my watchlist. This month, Stamps is the first addition to my Roth IRA as part of the Pencils IRA Project. Before the inevitable question arises -- do people even need to buy stamps or postage anymore? -- keep two points in mind:

In the most recent Starbucks conference call, Chairman and CEO Howard Schultz made this key comment:

"Holiday 2013 was the first in which many traditional bricks and mortar retailers experienced in-store foot traffic give way to online shopping in a major way. Customers research, compare prices and then bought the brands and items they wanted online, frequently using a mobile device to do so. -

Online shopping is becoming the new norm. Increased nline shopping necessarily comes along with increased shipping (and postage) needs. This helps explain why Stamps has consistently built its cumulative customer base over the past several years, as I explore in more depth below. 

One more point to consider is the fact that Amazon Marketplace -- Amazon's marketplace for independent sellers (now 2 million in total) -- is seeing record unit sales:

Amazon today announced a record-setting year for Marketplace Sellers with businesses of all sizes selling on Amazon. In 2013, Marketplace Sellers on Amazon sold more than a billion units worldwide, cumulatively worth tens of billions of dollars. The Amazon Marketplace, which consists of more than 2 million Marketplace Sellers of all sizes worldwide, experienced record growth during the busy holiday selling season. On Cyber Monday, more than 13 million units were ordered worldwide from Marketplace Sellers on Amazon, growing the total units ordered by over 50 percent year-over-year. -

I am pleased that Stamps has a partnership with Amazon, considering the Amazon Marketplace continues to bring on independent sellers and see record sales. There is an indisputable trend toward online retail, and I believe Stamps stands to capitalize on this trend in the coming years. 

With that said... how does Stamps stack up with our five "megagrower" pillars?

Purpose-driven business. Helping the world deliver packages isn't the flashiest of endeavors. Stamps -- recently ranked by Forbes as one of America's Best Small Companies -- is committed to helping business-owners and shippers save time and money by offering convenient and cost-effective postage, shipping, and online checkout solutions.

Part of what separates a purpose-driven business is the answer to the question: "What gets people out of bed in the morning to go work for this company?" As you will see in the leadership and company culture pillars, Stamps stacks up well in this department.

Innovative products and services. Stamps is one of only three vendors approved by the United States Postal Service to sell postage and shipping solutions online. Not only does this provide a sizable moat for Stamps, the company is currently in the process of scaling its business to meet the needs of higher-volume enterprises that are increasingly utilizing online shipping services. Additionally, Stamps continues to invest in strategic partnerships with Amazon and eBay, to seamlessly integrate with e-Commerce platforms and online shopping carts.

This January the company was assigned a patent -- four years in the making -- "for the computerized generation and printing of a U.S. Postal Service Shipping Label over the Internet." After many years of negotiating with the U.S. Postal Service, Stamps is also now able to sell first-class stamps for $0.48 versus the $0.49 charged by the U.S. Postal Service, marking "the first time in history that such a single piece letter discount has ever been made available by the postal service." In short, Stamps provides an innovative service that saves both the U.S. government and a wide array of enterprises time and money.

It also benefits the little guy too, Stamps's cumulative monthly customer subscriber count now stands at 468,000, up from 385,000 in 2011 and 435,000 in 2012. 

Visionary, experienced, involved leadership. Stamps has a slate of executive leaders who have been with the company since 1999 and are still 45 years old or younger. Stamps's independent directors own 14% of all shares outstanding. This management team has proven their commitment to the business, sticking with Stamps through the bursting of the tech bubble and the 2008 economic meltdown.

"We believe we have a very attractive and sustainable business model," says Co-President and CFO Kyle Huebner, "and are looking forward to delivering results over the next five years." Experienced, innovative, and forward-thinking management; that is a winning combination, if you ask me.

Consistently increasing cash-flow production. In the first three quarters of 2013 Stamps produced $33.2 million in operating cash flow, surpassing the $27.29 million of operating cash flow generated by the business in 2012. This is a marked improvement from the $4.8 million in operating cash flow generated in 2010.

This stellar cash flow production has led to a sturdy balance sheet of $87.21 million in cash with no debt. To top it off, in 2013 sales grew by 11% and earnings grew 35% to $38.93 million. With strong margins, continued cash flow production, and a rock solid balance sheet, Stamps is in excellent financial condition to capitalize on future opportunities.

While the company may report relatively slower results in 2014 due to shifts within the business, I believe management is making the proper adjustments -- and has the financial backing -- to ensure Stamps continues to grow over the long haul.

Strong company culture. Stamps prides itself on an entrepreneurial culture where employee creativity is encouraged. Employees give the company a 3.5/5 rating on Glassdoor, and CEO Ken McBride has an impressive 88% approval rating from employees on Glassdoor. The Better Business Bureau gives Stamps an A+ grade based on factors such as the company's low volume of customer complaints.

Foolish bottom line

I opened my position in Stamps prior to the company's earnings release just over a week ago, when the stock was trading at a P/E of 18. Despite beating analysts earnings estimates, the stock was hit by as much as 11% following the company's earnings report. Today the stock trades at a P/E of 15, which strikes me as a very reasonable value for a quality business capitalizing on the growing online retail market.

With a market cap below $600 million, Stamps will probably be one of the smaller (and lesser known) businesses added to the Pencils IRA Project. Despite the market's negative reaction to the company's latest earnings report (and my unfortunate timing buying in before the earnings report), I remain confident that Stamps will continue to generate value for its numerous stakeholders and offer market-beating returns in the coming years.

Short-term volatility is inevitable, but I think Stamps has a good chance of beating the market over the next 3-5 years and beyond. 

David K  [more]



A first look at LinkedIn (LNKD)

February 19, 2014 – Comments (0) | RELATED TICKERS: LNKD.DL , FB , TWTR

 I like a lot of what I see with LinkedIn (LNKD). The stock looks dirt cheap with a P/E over 800, am I right?! 

Seriously, though, I think LinkedIn actually has significant upside from today's levels despite its sky-high P/E ratio. CEO Jeff Weiner describes LinkedIn in this way: 

"Facebook is massive in scale and scope. Twitter is a public communication forum, but if I'm following you, you're not necessarily following me.LinkedIn is, simply, a professional network."

This would be a natural addition to the Pencils IRA Project at some point. Few college seniors will get by without starting a LinkedIn account, and the company's financial growth figures validate rapid growth in cumulative users of the service. In the 4Q 2013, the company's premium subscriber base grew 40% to $88 million (one-fifth of over sales). Overall membership increased 37% in 2013. Corporate customers under contract grew 49% year-over-year to 24,500 in the 4Q 2013. 

I'll explore these numbers in more depth soon, but wanted to provide a basic overview to get this analysis started. The company's operating cash flow production has been very impressive. Since 2010, LinkedIn has grown operating cash flow production at an average annual pace of 43.19%; between 2012 and 2013 operating cash flow production increased 63.43% to $436.47 million. The company has a stellar balance sheet with $2.33 billion in cash with no debt. 

Some folks on CAPS are arguing that LinkedIn's intrinsic value is something like $33 per share (currently the stock is hovering around $190). I think this is a stretch. The company has $19.43 per share in cash alone, with no debt. Not to mention that the company's cash flow production is accelerating, along with increased customer growth and retention rates. LinkedIn is currently valued at $23.1 billion, which isn't cheap, but compared to other social media stocks like Twitter and Facebook, the stock doesn't look as absurdly overvalued as some like to claim. 

The stock has such a high P/E ratio because management is heavily reinvesting back into the business. LinkedIn's price/sales ratio is 14.59, compared to Facebook's 21.73 and Twitter's 31.33. Since 2010, LinkedIn has grown sales at an average annual rate of 58.35%; increasing 57.21% in 2013. 

If LinkedIn can grow sales at "just" 30% annually for the next five years and trade at a P/S of 8 in five years, the stock would more than double in five years (use the Future Value valuation method, but use sales per share instead of EPS): 

13.45*(1.3^5)*8 = $399.51

This is fairly reasonable. And if sales increase 35% annually for the next five years and trade at a P/S of 7 in five years: 

13.45*(1.35^5)*7 = $422.17

Maybe these assumptions are too ambitious, but compared to other social media businesses (and considering LinkedIn's consistent revenue expansion) I don't think these are outrageous assumptions for the company going forward. I still need to do more research about the business and its various components, but thus far LinkedIn looks increasingly appealing to me. 

To top it off, CEO Jeff Weiner (age 43) has the type of mindset that I like to see in an executive. This quote gives you an idea of the type of leader Weiner strives to be: 

"Managers will tell people what to do, whereas leaders will inspire them to do it."

LinkedIn employees rate the company 4.6/5 on Glassdoor (one of the highest ratings in the country), and Weiner has a 98% approval rating (off of over 660 ratings). LinkedIn is rapidly expanding while maintaining one of the top company cultures in the world. 

More resources that I aim to explore: 

The company's latest earnings report (4Q 2013 results):

4Q 2013 conference call transcript:

LinkedIn looks strikingly overvalued at first glance, as do most social media businesses. LinkedIn, though, is generating cash flow (and revenue) at impressive rates and reinvesting back into the business to generate future growth. This gives the impression that the company is earning very little money when, in fact, the company is building a mountain of cash while reinvesting into the business for future growth. As they say, don't judge a book by its cover. The more I look into LinkedIn, the more I am convinced that the stock actually isn't all that expensive considering current (and projected) growth rates. 

I want to explore more specifics about the various components of LinkedIn's business, and aim to post my findings here. I am very intrigued by LinkedIn's story, and the stock looks appealing now that it has been hit down over the past several months. This very well may be one of the next additions to the Pencils IRA Project.   [more]



Thoughts on Earnings Season

February 14, 2014 – Comments (1) | RELATED TICKERS: CMG , NFLX , MNST

Market emotions tend to come out in full force during earnings season. It can be especially frustrating to invest in a stock just a day or two before the business reports quarterly earnings, only to see the stock tumble in after-hours trading after reporting earnings. Of course, sometimes the opposite can happen and we see a stock skyrocket after the company reports results that please Mr. Market. 

In case we needed any extra proof, earnings season is merely Mr. Market's way of reminding us that he has violent mood swings. Even Jim Cramer could look at Mr. Market during earnings season and say, "Holy cow, dude, take a chill pill." (Maybe interspersed with a few expletives and sound effects.) 

The key is to focus on the underlying business. In the vast majority of cases, one quarter (or year, for that matter) is not going to make or break a business. If analysts -- despite their infinite wisdom -- are wrong, heaven forbid, with their projections of a company's performance... so what? I'm not investing in a business because analyst Joe Schmo issued a "BUY" rating with a "price target" 20% above the current share price. I invest in a business because I believe in the business and its ability to produce value for its stakeholders over the long haul.

As investors who look beyond Mr. Market's erratic actions, focusing on the bigger picture is critical. After a company reports earnings, ask yourself: is this company's long-term potential, and capability of executing to reach that potential, still intact? If analysts do overestimate a company's short-term performance and the stock is punished as a result, it may represent a buying opportunity for investors focused on long-term performance. 

I remember when promising businesses like Chipotle, Netflix, Hansen Natural (now Monster Beverage), and others would get clobbered 15%-20% immediately after releasing solid earnings reports that beat analyst expectations in every imaginable category. Sometimes, Mr. Market just needs an excuse to unleash a concentrated dose of emotional chaos. 

So, even if you invest in a business only to see it get clobbered 10%-15% after reporting earnings, stay focused. I sold plenty of promising businesses after getting spooked or discouraged by short-term results and stock price movements. Companies like Chipotle, Netflix, and Monster -- all of which were and continue to be volatile stocks -- have gone on to absolutely crush the market despite the occasional 15%-20% drop after quarterly earnings reports. Looking at a graph of those stocks today, you can barely decipher where those "huge" drops occurred several years ago. 

In the long run the business is what will make or break a stock. This is especially important to remember in the heart of the volatility of earnings season. It's okay to get frustrated if Mr. Market is simply misinterpreting or entirely dismissing a great business in the short-term, but persist and keep the long-term in focus. We're investing in a market that is not necessarily geared toward long-term investors, but we will succeed by identifying (and investing in) quality businesses likely to succeed for many years to come. 

David K  [more]



The Most 'Foolish' College in the U.S.

February 13, 2014 – Comments (1)

Okay, maybe I'm biased as a Berea College student, but I think it is fair to call Berea one of the most (if not the most) Foolish colleges in the U.S. At the very least, it is a school that should be more widely known. This article I wrote delves into what makes Berea so unique in a time when many students are financially shooting themselves in the foot to go through higher education. 

In an Age of Constantly Rising Tuitions, This College Gives Full Scholarships to Every Student:

Rising student debt represents a major barrier for college students and new graduates to start a lifetime of smart money management. There is one college, however, supporting all of its students financially while offering a quality education curriculum. 

First, the problem 

CNN Money reports that the average student loan debt of the Class of 2012 was $29,400. A survey from Fidelity suggests that college-related debt for students increased to over $35,000 for the Class of 2013; 71% of 2012 college graduates had student loan debt. "More than 600,000 federal student loan borrowers who entered repayment in 2010 defaulted on their loans by 2012," according to federal data as reported by the Project on Student Debt. 

In other words, after spending several years in college, students are typically saddled with debt that could potentially take decades to fully pay off. Not the strongest start to a life of Foolish financial independence.

Bloomberg reports that the price of college tuition increased 1,120% between 1978 and 2012, far outpacing price increases in medicine, housing, and food over the same period. As college tuition skyrockets, so does student loan debt. So non-Foolish. 

Enter Berea College

Berea College is probably not a name widely known by most people. This relatively small liberal arts school -- I am presently one of Berea's 1,600 students -- has been nestled in the foothills of central Kentucky since the 19th century. 

Berea College offers full tuition scholarships to every admitted student. These are full four-year tuition scholarships, valued at approximately $100,000, given to each student. Students pay a portion of room and board, as well as other semester-to-semester costs for items such as textbooks. These expenses over four years pale in comparison to the average student loan debt incurred by students across the U.S. Berea students on average graduate with $7,600 in student loans, a third of the average student loan debt in the U.S. Approximately 25% of Berea students graduate without a lick of debt. 

Berea, however, takes it one step further. The college only accepts students with "strong academic potential and financial need." Berea offers full scholarships to students with limited economic resources who otherwise would have few (if any) chances of pursuing higher education opportunities without incurring substantial debt. 

Unlike most colleges, the majority of Berea College's revenue is not generated through tuition. Rather, nearly 80% of the college's operating budget is covered through interest income from the endowment, with the remaining gap filled by annual gifts and federal and state education grants. This model, possible thanks to the accumulated donations of thousands of generous donors over decades, enables Berea to offer full four-year scholarships to every incoming student. 

Berea's model could be replicated by other colleges and universities over time, but requires a focus on saving (rather than immediately spending) the majority of funds donated to the institution. Berea's large endowment of over $1 billion places the college in the top 10% in endowment size of U.S. colleges and universities. "The school uses its considerable endowment to lower costs to students," observes Richard Vedder of The Chronicle of Higher Education, "not shower resources on the other major claimants of resources within the college community." 

A noble mission rooted in practicality 

Berea College was founded in 1855 by John G. Fee, an abolitionist minister. Berea was the first interracial and coeducational college established in the South; not only were black and white students educated together, men and women learned alongside one another as well. Before the Civil War. This, coupled with the college's long-standing commitment to the Appalachian region and lower-income students, helps Berea stand out in the world of higher education. 

Berea is one of only seven colleges in the U.S. classified as a "work college." Every student is required to work at least 10 hours per week in the college's nationally recognized labor program, which includes student positions with facilities management, groundskeeping, the wood shop, campus life, and a myriad of other labor positions. This structure enables students to gain practical skills while learning that "labor, mental and manual, has dignity as well as utility." 

And no, writing this article does not satisfy my labor requirement as student government president! I am writing this article because Berea deserves to be more widely known, especially in a time when student loan debt is crippling a majority of college graduates. 

Why Berea is so Foolish

It is often quipped in the Berea community that Berea offers the best education that money can't buy. Some might assume that because the college offers full tuition scholarships to every student, the quality of the education must be diminished compared to other institutions. Quite the opposite.

Not only does Berea offer a rich experience through its forward-thinking history of racial and gender acceptance, labor program, and full scholarships for students from lower-income families, the college consistently ranks among the top higher education institutions in the country. Best Value Schools ranks Berea #1 among all best value colleges in the U.S. Kiplinger includes Berea in the country's top 100 best value colleges, ranked in terms of academic quality and affordability, and ranks Berea as the top value in private colleges with average net costs under $20,000. Washington Monthly consistently ranks Berea in the top 5 liberal arts colleges in the U.S. 

Welcoming students from "all nations and climes," Berea typically admits international students from over 50 countries each year, with alumni from 72 countries. You will be hard-pressed to find a more "motley" college determined to enrich the lives of students without shackling them with debt. 

Foolish bottom line

Berea College may indeed be the best kept secret in the world of higher education. Berea offers an attainable -- and very affordable -- quality college experience for lower-income students. So long as the majority of college students fund their college degrees through extensive student loan debt -- digging themselves into a financial hole just as they reach early adulthood -- it will be an uphill battle to help the world manage money Foolishly. 

Berea, on the other hand, is an inherently Foolish institution offering affordable education to promising students who otherwise would not have the means to attend college. By helping students avoid student loan debt, Berea enables students to retain control of their financial lives. The world needs more purpose-driven, Foolish colleges like Berea College.

Thanks for reading! 

David K  [more]



Annie's (BNNY) clobbered 14% after 3Q 2014 results

February 12, 2014 – Comments (0) | RELATED TICKERS: BNNY.DL , HAIN , WWAV

Yesterday Annie's (BNNY) reported its 3Q 2014 results. As you can probably guess from the stock's 14% drop over the past two days (touching a new 52 week low), the results weren't quite what the market was hoping for. 

For the sake of time, I will quickly summarize. For the quarter, sales grew 21.7% year-over-year, while diluted EPS only grew 7.6%. For the first nine months of fiscal 2014, operating cash flow produced decreased to $3.75 million from $4.21 million in the same period in fiscal 2013. 

Management also lowered its EPS guidance for fiscal 2014 to $0.92-$0.93 from $0.97-$1.01. Ouch. Now we can see why the market was a little disappointed with this report, considering the stock was trading at a fairly rich P/E multiple around 50. Growth can be backed by a rich multiple, but if the growth disappears there is little left to back up the high valuation. 

Some helpful comments from CEO John Foraker were in the press release (emphasis added): 

"Our results reflected continued top-line strength and accelerating momentum in consumption, driven by growing brand awareness, expansion in our mainline distribution, and the success of our new products," commented John Foraker, CEO of Annie's. "Consumers continue to adopt natural and organic food into their lifestyles and are demanding greater transparency in food labeling, which are important and positive trends for us.

"Earnings in the quarter reflected an improved gross margin trend versus the second quarter, as well as significant investments in our brand and the expansion of our talent base to help us meet the needs of our rapidly growing business. We expect solid adjusted earnings per share growth in the fourth quarter, despite tight supply conditions in the organic wheat market, the timing of certain productivity projects and a later Easter holiday this year.

"Importantly, our authentic and trusted brand, the additions we are making to our team and our deep innovation pipeline position us well for fiscal 2015 and beyond," concluded Foraker.

I cut Annie's some slack, because quite a few businesses expected bottom line margin pressure over the 2013 holiday season. However, it makes sense for the shares to get knocked down a notch. Sales growth of 21%, though, is hardly anything to scoff at. I don't have much doubt that the profit margin can be improved going forward. 

What's concerning for me is the decline in operating cash flow production year-over-year. I can handle slower earnings growth, but if operating cash flow is actually decreasing, I see that as a deeper cause for concern. This will be a key item to watch when 4Q 2014 results are reported in a few months. 

I think Foraker is correct with this statement in the conference call: 

As our sales results demonstrate, Annie's is clearly benefiting from favorable macro trends in natural organic food. More than ever consumers are seeking to avoid artificial and synthetic ingredients, looking for more positive nutrition and seeking organic and non-GMO options. As a result, they're gravitating towards trusted natural organic brands like Annie's. -

From my experience growing up -- and as someone with a gluten intolerance -- Annie's is absolutely a trusted brand with a fairly loyal following. Employees give Annie's higher ratings on Glassdoor (3.8/5) compared to Hain Celestial (2.4/5) and WhiteWave Foods (3.2/5). Foraker is also much more highly rated as a CEO (80% approval rate) compared to a 33% approval rating for Hain's Irwin Simon and 25% for WhiteWave's CEO. I mention this because I think Annie's has a strong brand, culture, and leadership that does not exist to the same extent with its larger competitors in the organic/natural products field. 

Now that the share price has taken a beating, Annie's currently trades at a P/E of 42.26. Hain's P/E stands at 30.44, and WhiteWave's P/E is presently 37.49. Hain is the strongest grower of the three (both top and bottom line), and yet it is trading at the lowest multiple by far. I'm definitely not selling my Hain position -- relative to its peers, Hain looks like a bargain right now. (Hmmm....) 

Slowly but surely Annie's P/E is falling toward levels where I might feel comfortable opening a position. Like I mentioned, I am confident in the long-term strength and staying-power of Annie's. Until the company finds some consistent performance with cash flow production and margins, however, I will not open a position with the stock trading at a P/E of 42. If the P/E falls closer to 30, I may start a position. Until then, I'm watching very closely. 

Long-term, I think Annie's can and will be a winner. For now, the company still has some things to prove and I think the stock's decline has been justified thus far. Watching closely to see where the company goes from here. 

David K  [more]



What Coke's and Green Mountain's Partnership Means for SodaStream

February 06, 2014 – Comments (4) | RELATED TICKERS: SODA , GMCR.DL , KO

Not gonna lie, this hurts at first glance as a SodaStream (SODA) shareholder. Okay, it actually hurts a little on the second and third glances also. Green Mountain Coffee Roasters (GMCR) is up 40% in after hour trading. SodaStream is down 6%. More of my thoughts below; first, here are some highlights from the press release announcing the partnership: 

The Coca-Cola Company and Green Mountain Coffee Roasters, Inc. Enter into Long-Term Global Strategic Partnership

The Coca-Cola Company (KO) and Green Mountain Coffee Roasters, Inc. (GMCR) (GMCR) announced today that the companies have signed a 10-year agreement to collaborate on the development and introduction of The Coca-Cola Company’s global brand portfolio for use in GMCR’s forthcoming Keurig Cold™ at-home beverage system. Under the global strategic agreement, GMCR and The Coca-Cola Company will cooperate to bring the Keurig Cold™ beverage system to consumers around the world. In an effort to align long-term interests, the companies also entered into a Common Stock Purchase Agreement whereby The Coca-Cola Company will purchase a 10% minority equity position in GMCR.

Under the terms of the equity agreement, The Coca-Cola Company will acquire 16,684,139 newly issued shares in GMCR for approximately $1.25 billion, which represents an approximate 10% ownership in GMCR (after giving effect to the issuance). The newly issued shares have been priced at $74.98, which represents the trailing 50-trading-day volume weighted average price (“VWAP”) as of market close today.

As part of the strategic collaboration, GMCR will be The Coca-Cola Company’s exclusive partner for the production and sale of The Coca-Cola Company-branded single-serve, pod-based cold beverages.The two companies also will explore other future opportunities to collaborate on the Keurig® platform.

There is no way to sugar-coat this (or corn syrup-coat this) -- this is a huge win for GMCR. Huge. 

For one thing, I do believe this validates that at-home carbonation systems are more than a fad. If it is worth Coca Cola's time and resources to invest over $1 billion to enter this market, it is likely more than a fad. This is a plus for SodaStream. 

However, GMCR will likely capture a market that SodaStream has had a relatively difficult time grabbing (among its overall operations): repeat syrup sales. This also happens to basically be the highest margin component of this business: the "blades" in the razor and blade model. I think people will find Coca Cola syrups much more appealing than flavor mock-ups designed by SodaStream (or anyone else, for that matter). 

Part of me wonders if Coca Cola ever considered or approached SodaStream as a partner. Coca Cola is paying $1.25 billion for 10% of GMCR (which, it looks like, will increase in value 40% overnight... not bad). For the same amount, Coca Cola could have easily purchased all of SodaStream, which is currently valued at $745 million and already has a carbonation product and existing customer base. 

I don't think this is game over for SodaStream, but management better be scrambling to boost the business. For the first time, it looks like SodaStream will have legitimate and serious competition from the big players. What's to stop other potential players in this market -- Pepsi and Starbucks come to mind -- from following Coca Cola and entering the at-home carbonation field? SodaStream would be a logical option for a partnership or buyout from one of these other larger players in the beverage field.

Heck, I could even see some sort of partnership with Monster Beverage (another business in which I am invested). I see plenty of options for SodaStream to bounce back, but time will tell if management is strategically smart or stubborn in a boneheaded sort of way. I'm not selling my shares, but I'm not looking to add to my position anytime soon until management demonstrates its competence. 

I do not, however, see this partnership as the beginning of the end for SodaStream. I think it legitimizes SodaStream's market and makes the company all the more appealing of a potential strategic partner and/or buyout candidate for the big dogs competing against Coke. It's up to SodaStream's management to capitalize on this opportunity -- the next several months will be very telling. 

David K   [more]



Alliance Fiber Optic Products (AFOP) - Undervalued Micro Cap?

February 04, 2014 – Comments (5) | RELATED TICKERS: AFOP.DL

Alliance Fiber Optic Products (AFOP) designs and manufactures components used in the connection of optical fibers and optical fiber networking solutions. Today the stock fell 22.4% after reporting supposedly "disappointing" results. 

Let's see what constitutes "disappointing" to Mr. Market: Year-over-year revenue increased 79%, net income (excluding one-time tax benefits in 4Q 2012) increased by 136%. Wow, what terrible results. Sell. SELL!

Some things to like about AFOP: 

** The company is growing like nuts. Sales expanded 63% in 2013. In the first three quarters of 2013, the company produced $12.23 million in operating cash flow, compared to $9.34 million produced in all of fiscal 2012. 

** Peter Chang -- founder of AFOP in 1995 -- serves as Chairman, CEO, and President. Chang is largest insider owner of the business, owning 2.13 million shares of the stock. 

** Management expects sales to increase by at least 85% in the 1Q 2014. In other words, there are no signs the company's growth is slated to stop anytime soon. 

** The stock is trading at a P/E just under 12.5. Are you kidding me? 

** $46.68 million in cash with no debt. 

** This is a tiny and, basically, unfollowed business. One lonely analyst follows the company (which has a market cap of just $221 million). That one analyst, for what it's worth, anticipates AFOP's earnings will grow 25% annually over the next five years. 

All in all, AFOP is a business that is rapidly growing its top and bottom lines, shows no signs of letting up growth, has a strengthening balance sheet thanks to stellar cash flow production, and an active/experienced founder and leader. That's a lot to get for a P/E under 13. 

I'll probably rate this an outperform on CAPS tomorrow. Micro caps can be tricky to evaluate (and very volatile, as AFOP's performance today demonstrates), but AFOP seems to have solid financial growth, involved management, and bright prospects trading at a very reasonable valuation. 

David K  [more]

Featured Broker Partners