I haven’t looked at a Keith Schaefer tease in ages, so this one popped to the top of my inbox when a few readers asked about it… the ad is for his Investing Whisperer service ($5 first month, renews at $99/month), which has generally recommended small caps and microcaps over the years, and he’s teasing a new consumer product company with this headline:

“A Screaming 2-Buck Buy: North America’s Newest Iconic Brand”

Here’s a little of the lead-in to the pitch:

“I’ve discovered a newly listed $2 stock. I’ve vetted this trade inside and out.

“Within the next 3 weeks, news will break — and it could be TRANSFORMATIONAL.

“That’s because the news will signal to the Street that it’s a high-likelihood acquisition target…

“Which could send shares soaring 3X — or even higher.

“That’s why I’ve made it one of my biggest positions in the Whisperer portfolio.

“And one of my biggest bets ever.”

So what is it? He’s talking about some kind of new energy drink company, which is a very crowded aisle at the supermarket these days — but hope springs eternal, because everyone knows about the massive success of Monster Beverage. The stock is up 650%, twice the return of the S&P 500, just since they renamed the company after their hottest product in 2012… but it’s up 130,000% since 2002, when a little natural soda and juice company that was then called Hansen Natural released the first version of the Monster energy drink. Monster is now the best-performing stock of the past 25-30 years… so far, at least… and that is encouraging lots of copycats, both among product developers and among stock pickers.

The most recent boomer in this space was Celsius Holdings (CELH), which had a breakthrough in “healthier” energy drinks a few years ago and is up about 4,000% over the past five years, but plenty of other folks are also pushing energy drinks that have less sugar than the big guys… or are otherwise perceived as better for you. And Schaefer is pitching a relatively new entrant in that segment… here’s how he puts it in his ad:

“The U.S. energy drink marketplace is valued at roughly $21 billion — and about 4 times that, globally.

“The problem is — so many of these energy drinks are actually pretty bad for you.

“And that’s largely because of all the sugar.

“It’s estimated that as much as 24% of all sugar in the U.S. is consumed through beverages.

“And it’s no secret that one in every three Americans is either diabetic or pre-diabetic.

“Now what if I told you there’s a healthy alternative…

“One WITHOUT all the sugar and carbs, WITHOUT the artificial sweeteners and synthetic ingredients — and WITH organic ingredients sourced from fair-trade farms?

“And, by the way, it tastes delicious!”

Some other clues about the particular stock he’s pitching:

“Each product in its line has only eight total ingredients…

“This new brand is growing exponentially – with new deals happening quickly, in some of the biggest retail chains in America.

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“Its energy drinks are flying off the shelves at big-name chains like Costco, ACME, Safeway, and Shaw’s — with more new deals underway right now.

“One of them is a MAJOR new deal covering 24 states and 10,000 retail stores….

“The company’s Direct-To-Consumer sales accounts for an impressive 35% of their business [READ: Amazon, Shopify, etc.].

“And it’s getting a 79% retention rate among its Direct-To-Consumer sales.

“It also counts Google as its #1 customer — serving nearly 25,000 employees at its massive “Google-plex” campus in Mountain View, California.”

And apparently the CEO has been around the block with other energy drink companies…

“The CEO of my favorite new stock brings a wealth of industry experience, and one heck of a track record:

“He had a big hand in creating the very first energy drink in the U.S. (under the brand Hansen’s Natural)…

“After leaving Monster Beverage Co., he joined another group — which launched the drink that would turn into the popular brand SoBe….

“Two more of his brands were sold to Coke — so if you’re keeping score, that’s 1 drink brand sold to Pepsi, and 2 sold to Coke.”

And Schaefer thinks that the experience of the management team has helped them ramp up distribution more quickly than others, and will lead to a takeover deal by either Pepsi or Coca Cola as their sales grow. And it has also apparently had some good growth just this year…

“Its first quarter results were a big surprise to the Street: 130% year-over-year growth and 88% quarter-over-quarter growth.”

So what’s the stock? This is a maker of yerba maté-infused energy drinks and seltzers called Yerbaé (YERB.U.V on the Venture Exchange in Canada, YERBF OTC in the US).

And yes, the co-founder and CEO Todd Gibson was previously involved with Monster, SoBe, Fuze, and NOS, and worked at Coke for a while after that company bought Fuze and NOS, then launched Yerbaé with his wife, Karrie Gibson in 2017. They went public through a reverse merger on the venture exchange that closed in February of this year. They say they’ve sold 28 million cans since the product was launched, and are now available in 10,000 retail locations as well as direct (Amazon, Yerbae.com, etc.).

They did post 130% revenue growth in their first quarter as a publicly traded company, that earnings report came out at the end of May (so we probably won’t get updated numbers until late August). They still lost a ton of money, but, in their defense, most of that was because of the high cost of the reverse takeover, most of which was covered by issuing shares to the founders and other investors — their operating expenses were $17 million in the quarter, but $12+ million was “non-cash” listing and consulting expenses.

The numbers don’t look great just yet, partly because they raised a fair amount of capital in connection with the listing, including some convertible notes and warrant issuance, but on the growth side they are ramping up pretty nicely — and it looks like they do have at least some reasonable expectation that the numbers will improve as they grow, since they outsource all the actual manufacturing and canning of the drinks and have kept their gross margin at pretty close to 50%, with so far a very small headquarters staff.

So there is some reason for hope, particularly if they can get enough “brand ambassadors” to go viral with the product… assuming, of course, that people like it more than competing products. They seem to have some good “marketing energy” at the top of the company, but it’s also an extremely competitive segment they’re trying to break into — and all the big players are also releasing healthier energy drinks, and have massively larger marketing budgets and a lot of leverage over retailers.

But they do have to grow, a lot, to build up to something meaningful and have a hope for mass adoption and profitability. Or a buyout. I’ve never tried the product, so I’ll keep an eye out for it and see if it strikes me as something worth sipping before I consider buying… but they do have, at least, strong revenue growth right now, along with ambitious executives, and they’re very small and trading is very light. The market cap is about $125 million at the moment, at $2.25 per share, and trading volume peaked last week at about 75,000 shares on August 7 but is usually way below 20,000 shares. That means the full trading volume is only about $50,000 most days in the US OTC market, which is absurdly illiquid — so if you do like the stock, be careful, the price could easily move 10% just because one person bought a $10,000 position (and trading is even lighter in Canada).

The optimistic slant is that Yerbaé has grown distribution pretty strongly in its first five or so years as a new product, and may be getting some traction with larger distributors now… and has numbers that are better than the headlines look for the first quarter, thanks to those going-public costs that won’t be repeated. They had 130% revenue growth in the quarter, and the first quarter was their best quarter ever, and there’s some potential to catch investor attention because the second and third quarters are seasonally the strongest for cold beverage sales. They are already effectively getting into the “beat and raise” game, as their first quarter press release included this comment:

“As the market has been notified already, in 2023 we anticipate US$12.5M in net sales which is 74% above our previous year. With the companies growth at +130% in Q1 and +171% in April of 2023, landing at approximately US$5.1M, Yerbaé believes the current trajectory puts the brand in a position where we can exceed these projected sales.”

Add to that, their original unsweetened Energy Seltzer might be fairly mature, but it’s also only about 10% of their sales — the big push is for their stevia-sweetened Energy Drink which was introduced in 2020, so that’s still quite new to the marketplace. And using outside bottlers means there’s some hope that they can grow without huge capital costs, so they might not need to raise or borrow huge chunks of money to build plants, though they’ll definitely need to raise more capital in general (I don’t know how long they have to pay their suppliers, but they’ll need more working capital to fund higher production, and they have essentially no cash on the books right now — the book value has been negative for several quarters). They did a private placement of convertible bonds/warrants back in April, after the last quarter’s books were released, so they should have close to $4 million in cash, which will at least make things less urgent for a while.

The pessimistic slant is that growth is expensive, they have many competitors who are large and well-capitalized (even within just the yerba mate niche, there are a lot of smallish brands), and we don’t know if they can ramp up their sales without spending a lot more money. In the first quarter of this year, they had to burn about $2.9 million in cash to generate $1.7 million in gross profit, mostly because their cost of goods rose sharply with inflation — so that’s not dramatically better than a year ago, when they had to burn about $1.7 million in cash to generate $1 million in gross profit. The scalability should be there, particularly if they can keep their margins under control as they grow, but there’s no proof that it’s coming anytime soon (they contract with big bottling plants to do the actual manufacturing, which should be more efficient as they order more, but they don’t have much control over ingredient costs).

So… maybe worth a look? This is still effectively almost like venture capital funding, considering that they’re very early in their hoped-for sales ramp and are currently valued at about 10X their expected revenue in 2023, which is a valuation that’s clearly built on optimism, but that just means it’s risky, not that it’s guaranteed to fail (coincidentally, that’s also about the valuation at which the $60 billion Monster (MNST) trades, and faster-growing Celsius (CELH) is at 15X sales… though other smaller or slower-growing hopefuls in the “healthier beverage” business that we’ve looked at before, like Zevia (ZVIA), are often at less than 1X sales). All of these kinds of consumer product startups are in some part faith-based, which is why I wouldn’t invest without trying the product, but that kind of faith is also quite personal — sometimes a brand catches lightning in a bottle, sometimes it fizzles.

Have reason to like or loathe Yerbaé, either as a stock or as a beverage? Let us know with a comment below.

Disclosure: of the companies mentioned above, I own shares of Shopify, Amazon and Google parent Alphabet. I will not trade in any covered stock for at least three days after publication, per Stock Gumshoe’s trading rules.