“3 Undiscovered Stocks That Could Explode This Year!” from Penny Stock All-Stars

Where is Gordon Lewis looking for the "next Apple?"

By Travis Johnson, Stock Gumshoe, September 23, 2013

With a name like “Penny Stock All-Stars“, you’d probably guess that you’re looking at a company that looks for huge gainers in tiny companies — and if you’re a relatively sober and thoughtful investor, you’ll also be pretty sure that this means that even a good newsletter in this category is likely to have a few flameouts for every 100%+ winner… the plan, among these small cap letters, is usually that the losers get cut off before they fall too dramatically (and therefore get nicely expunged from the published portfolio), and the few hopefully very large gainers (100%, 500%, 1,000% if you’re lucky) will more than make up for the losers.

I think I’ve only covered this small Penny Stock All-Starts newsletter once — the editor is Gordon Lewis, and we covered his teaser pitch for a few companies back in 2011. He kept running similar ads for quite a long time, touting the “next Dominos” and the “next Las Vegas Sands” … the pizza one turned out to be small regional pizza player Pizza Inn (PZZI), which is trying to bring a new “Pie Five” concept national and tripled this Spring but then came back and is now still a solid 100% gainer from when they wrote about it, the casino operator was Full House Resorts (FLL), which has also been pretty volatile but is now more or less flat from two years ago. So neither was a disaster, and there were chances to make good gains in both.

Worth a check, then, to see what he’s teasing this time? Why not?

The basic pitch is the same — that he’s looking for “x-factors” that will help you discover the “next Apple” while it’s still a penny stock, including good management, a hot social or economic trend, and takeover potential. And as he did a couple years ago, he’s teasing three “all-stars” in Penny Stock land that he thinks are “undiscovered stocks that could explode this year.”

Shall we jump right to the clues?

“The Next Coca-Cola?

“Last year, Coke sold nearly $48 billion worth of drinks, and raked in nearly $8 billion in profits. Despite the success, consumers are drinking less soda these days. In fact, a major paper reported that “sales of carbonated soft drinks fell 1.2% last year…”

“Consumers are becoming more health conscious, and looking for lower calorie natural drinks. It’s an opportunity for an enterprising beverage manufacturer we’ve uncovered.

“The company’s core products are a line of 24 natural beverages sold throughout the US, Canada, Europe, and Asia. What sets this company apart is every product is made with all-natural ingredients and crafted with care. Products are sold primarily through 14,000 supermarkets and natural food stores. You’ll find their products in Kroger, Costco, Whole Foods Market, Trader Joe’s, and Sprouts just to name a few.

“Company revenue has doubled over the past three years thanks to rising demand… and losses are quickly evaporating. Management expects sales growth to accelerate going forward. Branded products sales are rising. Distribution is expanding and new products are taking off. Best of all, their private label business is gaining traction. It’s a rapid growth story in a huge market!”

This is a stock we’ve thought about before here at Stock Gumshoe — I covered them a while back when I was mentioning some potential stocks in the natural soda space, and our contributor Myron Martin featured them as a favorite idea in one of his columns for the Irregulars a few months ago. This is Reed’s (REED), the natural soda company whose primary products are Reed’s Ginger Ale and Virgil’s Root Beer, both natural sodas that are actually brewed. And I kind of like them, personally.

This is a very, very small company that’s trying to get up to scale by producing private label natural sodas for big chain supermarkets and then, once their foot is in the door, trying to sell their premium Reed’s and Virgil’s products (and a few others, including China Cola and the Harry Potter-inspired Butterscotch Beer). In my experience, I generally see them in Whole Foods and Trader Joe’s and in small local natural stores and coffee shops, but they’re not featured heavily in big supermarkets or in the places where soda consumption is highest (like fast food restaurants).

They are not profitable yet, but they’re pretty close to break-even — the revenue growth and volume growth have been solid, both at or near 20% lately (and close to that level for quite a while), and they’ve been pushing up against production capacity for their core products — in the last quarter they said they would have posted a profit if not for a substantial loss on a private label contract. There’s one analyst covering the stock, but I have no idea how current their opinion is — they list a $2.50 price target and predict profitability next year, but when there’s only one analyst on a stock you have to look at their numbers even more skeptically than you do an average analyst prediction.

REED is not in a real cash crunch, since they have enough to get through another few quarters at this “near break-even” level, and they can probably borrow if they need to, but neither are they super-flush with cash. It seems likely that if reaching capacity on their core products was a limiting factor this past quarter, they’ll probably have to expand to continue the growth trajectory. They’ve raised cash through private placements pretty much every other year since going public in 2006, so presumably they’d continue to do that and sell stock if they need to. That might be an opportunity for the stock to dip a bit, but these have generally not been huge capital raises in the past so it might not have a dramatic impact if it happens. Their founder and CEO does have a large stake in the company, so hopefully that’s a limiting factor on dilutive offerings.

I like the growth, I like the products, they’re positioning themselves well as a healthy soda alternative and, to some extent, as a nutraceutical like POM Wonderful with the ginger angle and their Kombucha product, and they already have good brand recognition and excellent distribution in their core natural foods stores market. The next leg of growth will probably have to come from pushing more volume through the natural foods channel or getting meaningful sales in traditional supermarkets (they’