It's been a brutal week for retail investors who've been waking up to scour financial websites as the news blares on the television in the background. Getting the major equity indices to six-month highs has been no small feat as landmine moments have scattered to and fro amid the litany of news. We are prepared to exit the first intense week of earnings season on an upbeat note, with news out of Europe being, for once, not apocalyptic.
Now attention shifts to the Federal Reserve's upcoming gathering and -- you guessed it -- another heavy dose of earnings, headlined by the industrials. I am not particularly interested in these, given their exposure to the European Union and slowing emerging-market growth.
As such, I wanted to use today to mentally reset, having been swept into the news whirlwind as soon as it hit 1 a.m. EST Monday. Oftentimes I feel as if my hard-learned investing principles get lost in the sauce during earnings-season madness, when the consumption of conference-call clues initially holds as much sway as does comparing assets to liabilities on the balance sheet. So, just for today, I am returning, with authority, to my former, reasonable value-investing self.
Value-Investing Sanity Check
The only criteria I developed for this exercise were as follows. First, the stock had to severely be out of favor with the market and, second, the company had to have a positive story to tell that didn't require an analytical spin job (I could always spot a spin job by the use of "ifs"). Finally, it had to be a small-cap name, given that large-caps have stolen the show in the current environment.
With all of that in mind, the stock that had me kicking it old-school was private-label drink and concentrate maker Cott (COT).
Yes, you are likely to read that Wal-Mart (WMT) accounts for 32% of Cott's annual revenue, and that an exclusive deal with the Bentonville Bruiser, which began in 1998, will end Jan. 28. If Wal-Mart introduces a new private-label soda company onto its store shelves, clipping the business that Cott has cornered for nearly 15 years, is that a source of risk? Absolutely -- but allow me to play devil's advocate here.
1. Wal-Mart is anti-change. Given that the company has won back customers by reintroducing products that were removed from the shelves in 2010, I am inclined to believe Wal-Mart won't jeopardize its reenergized customer traffic by testing wide-scale new brands. That's one point for Cott.
2. No definitive deal, from what I can tell, has been inked to dethrone Cott's position with Wal-Mart. There's another point for Cott.
3. Wal-Mart's stock has earned rock-star status in the last five months. Clearly the company is doing some things correctly on a global scale, and one has to believe Cott is going along for the ride. That's yet another point for Cott.
Having presented that information, I'll now get to the interesting-looking raw numbers on Cott. These shares are priced at 8.7x forward earnings, and they're trading nearly in line with book value, so they've baked in a ton of Wal-Mart risk. Assuming Wal-Mart business does not fall off a cliff, Cott has a business that should continue to benefit from a private-label consumption push in Europe.
Meanwhile, low-to-middle-income households are showing a lingering reluctance to trade back up to brand-name products, which is positive for Cott. In addition, the company's Cliffstar acquisition appears to be little-reflected in the company's valuation. This is undeserved, as that business has performed quite well since being brought into the fold.
Basic Talking Points
• 2012 should be a year of improvement for Cott's costs of goods sold, or COGS (78.9% of COGS are variable).
• Volume in the U.S. and UK, excluding Cliffstar, was solid in the turbulent third quarter. What really stood out were the double-digit percentage gains in each country and the fact volume did not take a nose dive.
• Debt incurred to fund the purchase of Cliffstar is not due until 2017 and 2018, and this is most of the debt on the company's balance sheet. Cott has ample room to meet its interest obligations. While a material loss in Wal-Mart business would dent this view, it would not overthrow it.