Sunday, May 3, 2009

Jonesing For a Crazy Few Years...

Jones Soda (JSDA) is probably my favorite example of a John M. Keynes "Sometimes, the markets can stay irrational longer than you can stay solvent" stock... They have some pretty tasty products too. Check out it's chart since 2003:

A few years ago, I was tossing around the idea of shorting the stock-when it was trading at what seemed to be an astronomical 100x+ earnings. 'The price?' you ask? Around $12 bucks a share. Oddly, I remember thinking that if it was around $3 dollars, it might be compelling; or at the very least, at a price in which I would want to cover any potential short.

In various conversations that I had with people over shorting the stock, I got the following reactions (in no particular order):

1) I can't believe that the stock is that expensive.
2) You may think that it is worth $3 bucks a share, but it will never get there. You are a cheap bastard.
3) Shorting is a bad idea because, hypothetically, your losses have no limit.
4) Huh?
And my personal favorite:
5) Jeff, shorting is evil and sleazy... even for you.

For several reasons, I didn't short the stock. Mainly, I was busy deploying capital into other equities and properties-I simply didn't have any cash left laying around for a relatively speculative play. This turned out to be a really good thing; if I would have done any sort of a meaningful short, I wouldn't of had any downside (or upside, depending on how you look at it) protection in the event of a margin call stemming from an up tick in price.

In the months following my thesis the stock rose... it rose, rose, and rose some more-getting above $28 bucks a share. So, there I was, thinking "WHAT!?!?!?" and "Wow, I am glad I didn't go short." Further more, I was shocked that the little company could be bid up to such absurd levels of price-did the people buying the stock have brains? Were they too stupid to look at the financials and filings of the company? Did they even care? Needless to say, at this point, I was more confident in the idea of shorting than ever, but in a moment of weakness, I still couldn't bring myself to do it... After all, I had pretty passionately spoken against the stock and was looking really bad to the handful of people I had discussed the idea with ('Way to go against the crowd', I know).

Then came the precipitous fall, complete with a boat load of insider selling... the price of a single share recently went down to less than 1/2 what a bottle of their soda will fetch in Starbucks; the stock would probably be a better investment than the soda too! This, after the company mis-judged the demand for their product and sold it in cans, rather than the traditional bottles that a charm of their own. The thing that I think management missed, was that there is nothing wrong with a company NOT growing at exponential rates, so long as they generating a ton of cash and then returning it to shareholders... so long as the growth is less prudent, from a capital allocation standpoint, than stagnation.

As for the future of the company, I could guess that it will go private, but probably not. Ownership of the company is incredibly fragmented, with there never having been a 13D filed. It is quite unfortunate too, had shareholders been united and smart enough to go against management, then maybe the company wouldn't have been hemorrhaging cash for the past few years. Heck, had management had more skin in the game, maybe things would have been a bit different.

Interestingly enough, the company not only has the historic ability to generate significant cash flows, but are one of the few that actually has a cult following- there may actually be a future for the brand! Personally, I still remember the first Jones Soda that I ever tasted... a 'Berry Lemonade' that I got at a gas station in southern Illinois on a summer trip-I thought it was the best soda ever. It's that kind of memory that may save the company from a history of poor capital allocation.

With that said, the founder of the company recently stepped down from his position on the board, over concern of the direction of the company. This, after having stepped down from being Chairman and CEO in 2007. While it may seem that he played a significant role in wrecking his own company, you still have to wonder what he saw-did he realize that the bad direction was his own doing, couldn't be righted, and didn't want to be on a sinking ship? Or were his reasons legitimate?

Lessons Learned:
1) Only question yourself based on facts, not the opinions of other people (learning this was a good thing-for example take my huge losses, which turned to great gains on SNS).
2) Don't underestimate how expensive 'growth' can be.
3) The markets can and often stay irrational longer than you can stay solvent (thanks to JMK for that tid bit).
4) Things do get 'just that cheap'... all the time.

Disclosure: No position, just thinking out loud...


Joshua Wallis said...

JSDA is insane. I still kick myself for not buying it when it was trading for 28 cents a share...what a no brainer.

Just a side note. I remember when Cramer was hawking up this stock at 7~ish a share...god I hate cramer.

Tariq said...

It's funny that you were thinking about shorting it.

I actually purchased JSDA at $9 and sold at $25... mainly due to the switch to cans over bottles.

I still remember the insane amount of optimism behind the company though. It was disturbing to see Cramer pump it on CNBC and then hear about how investors were levering up, putting their life savings into the company.

Anonymous said...

I love the idea of buying a niche soda maker with great margins at a fair price, but here $1 per share looks expensive. They have exorbitant sales, marketing, and GA expenses relative to their gross profit.

2006 looks to be their best performance, earning $3.6 million before tax. At a 10x multiple, that puts us close to the current market cap. Of course, that assumes that JSDA can get back to peak profitability.