This will be the last Traderade Ideas for 2022 from me. Starting next year, we hope to make this a little more structured. Ideas keep coming up and I am just eager to get them out to you.
Right now, I'm looking at two companies that I find quite interesting and both are below $10 per share. With companies like these I like to take a small position and just hold them. These are more buy and hold type companies because the thesis is one of growth within their markets.
Both these companies have financial issues to sort out and need time to grow. Given that they both have quite a low cost per share, I'd be willing to take that risk.
Why these companies and not some other tech stock, which have been equally beaten down? Because these companies have actual products and I have a view that they will grow because they have solid strategies.
So the bottom line: both companies are high-risk investments but, have a path to profitability and success if they manage their strategy well.
We will cover one company today and one in the next article after the new year.
SunOpta is a plant-based manufacturer. They're main product is oat milk but they also have a fruit business that gaining market share.
Plant-based milk and products are gaining ground as people begin to realize that it's better for them and the environment. 2/3rds of people are lactose-intolerant.
Almond milk is currently number one in the plant-based milk category even ahead of soy. But, almond milk also required massive amounts of water and is harmful to the environment.
Most plant-based milk is not great for coffee as they tend to separate and create no froth. But, oat milk is basically oats soaked overnight in water and blended. This gives is froth, is more stable and is preferred for coffee / hot beverages.
SunOpta is a preferred supplier for Starbucks because SunOpta actually infuses the milk with enzymes to make sure that the pH matches the acidity of the coffee. This is their private label supplies.
They also have co-manufacturing such as Planet Oat and Califia Farms where they manufacture for the brand and have secured supply contracts.
The company is also expanding their manufacturing capacity both for oats and fruits.
Financial Standing:
As I said, the numbers are nothing to write home about they have some ground to cover. A little bit about their numbers:
The debt is 80% asset-backed debt, which has reduced cost of funding. Quite possibly, they've pledged their manufacturing assets.
They are rated B- by S&P Global which is deemed highly speculative.
Debt is due in 2025 and since most of the debt is revolving and bank debt, I would think it's based on a floating rate which is increasing with the Fed Funds rate.
Their Weighted Average Cost of Capital (WACC) is 7.2% while their Return on Invested Capital (ROIC) is -1.79%. These numbers are terrible.
Plant-based milk is still seen in the luxury category and in fact, Starbucks charges slightly more for oat milk.
There is still lack of awareness and concern for people to switch to plant-based milk or even from almond milk.
Growth trajectory slows down and the company continues to lose money. Servicing long term debt becomes an issue.
Valuation is still very expensive with an EV/EBITDA of 30.6x.
There's no ideal entry or exit for this company. I think this has a potential growth story and buying the company below the 50-day moving average would be quite acceptable, i.e., below $9.40. You could wait for a further pullback below the 200-day which is $8.32.
The company's price got hit badly on the launch of Oatly. We've had a lot of sentiment trading in this market where people don't really dig into companies much. STKL has a better strategy than Oatly and as you can see from the comp table above, it has better numbers as well.
Again, this is a high-risk investment so I wouldn't allocate a huge amount of capital. We will cover the next company in an article next week.
This is not investment advice. I have no position in this company but, I may initiate a position 3 trading days after the publication of this article.