If you’ve been watching the wire, you’ll already know that ROX is the latest hot small-cap stock on the NYSE, following a February 28 announcement that it had inked a deal with Walmart to supply 4,500 stores with America’s no.1 ginger beer brand, Goslings. As of March 1, Goslings Stormy Ginger Beer and Goslings Stormy Diet Ginger Beer are available on the shelves of approximately 40% of Walmart’s entire chain.
On the day of the announcement, the share price of ROX soared to as high as $1.45, from an opening price of $0.72, a 101.3% spike. The stock has since succumbed to profit-taking, and now trades at $0.99. The 200-week moving average has served as a magnet for the stock, as on the day of the announcement the stock violently traded in a broad range, yet closed at the 200-week moving average. This week, the 200-week moving average was once again a wall for the stock.
Given the comparative market capitalization of the company against its competitors (much larger, too), the stock may easily reach $6 per share, if Wall Street begins to price the stock closer to the company’s industry peers.
Here’s why I like the stock, and expect power moves higher in the future, taking out the overhead resistance at the 200-week moving average at approximately $1.00.
- Revenue growing at CAGR of 20.5% since 2013, and accelerating. In 2016, revenue rose 25.7%. Gross margin has increased each of the past four years. Operating profits and net income have increased in each of the past four years. Very strong balance sheet.
- Consistently grown core brands faster than industry average
- Directors and officers own approximately 41% on a fully-diluted basis
- Shipments of Jefferson’s Bourbon increased 45% to 61,000 cases in fiscal 2016, compared with 42,000 cases in fiscal 2015. Shipments of Goslings Rums in the U.S. increased 8% to 135,000 cases in fiscal 2016, compared with 125,000 cases in fiscal 2015. Shipments of Goslings Stormy Ginger Beer increased 56% to 1,115,000 cases in fiscal 2016, compared with 715,000 cases in fiscal 2015.
- Castle Brands holds an exclusive market agreement for Goslings brands in the United States. Agreement with Walmart for the United States’ no. 1 ginger beer, Goslings Stormy Ginger Beer and Goslings Stormy Diet Ginger Beer, is a monopoly.
- Publicly-traded drinks companies trade between 5x and 6x revenue, and 16x and 20x times EBITDA. ROX trades at only 2.38x revenue. Castle Brand’s closest competitor (by revenue), Remy Cointreau (RCO:FR), trades at 4.28x revenue and 22.7x EBITDA.
Frankly, although ROX has recently gained attention on Wall Street, this stock is grossly depressed at even the $1.00 level. I’m long at $1 and I’ll be adding to my position in ROX, especially if/when it clears the 200-week moving average.
Earnings won’t come out until mid-May, at which time I expect fireworks. In the meantime, I’ll be watching this stock closely, as I may take a bigger position in ROX at anytime between now and early-May, the latter time of which I expect a ramp up in the stock price as we approach earnings within approximately two weeks.
Castle Brands will have one month of sales to Walmart reflected in Q1 revenue, so I (and the world) will be able ascertain whether to continue holding the stock as a long-term play, or not.
And here’s a bit of interesting information that makes my heart warm over. “The Warren Buffett of Biotech,” Dr. Phillip Frost, has taken a 33.5% stake in ROX. What?
This billionaire septuagenarian believes ROX is grossly undervalued. And when I delineate the company’s vitals, you’ll see why this stock is in my portfolio as of last week. Remember, I don’t have many stocks in my frying pan, and will be thinking of this stock each night. Here’s a link to the Forbes article about Frost and his 20 stock picks. You’ll see ROX among the list of stocks he owns, and the stake he has in the company.
Forbes Magazine: The Buffett of Biotech’s Portfolio
Disclosure: I’m long 60,000 ROX at $1. I intend to hold for a few weeks to months.