(Editors' Note: This article covers a micro-cap stock. Please be aware of the risks associated with these stocks.)
In the past month the stock of a previously unknown issuer The Alkaline Water Company (OTCQB:WTER) has taken investors for a ride.
WTER.OB has risen from $0.35 to $0.60 amidst a flurry of hyperbolic press releases issued by the company (Exhibit A below), but I believe this hotly touted stock could be due for a crash in the not too distant future.
Reason 1. The product sucks
Essentially the product is water, water in an ugly bulk plastic container. The company claims to employ a "state-of-the-art Electrochemically Activated Water system to create 8.4 pH drinking water without the use of any chemicals".
But away from the glitz and glamour of the corporate marketing materials their 8-k filing concedes "Health benefits of alkaline water are not guaranteed and have not been proven. There is a perception that consuming alkaline water has beneficial health effects."
How or why anyone requires exactly 8.4 pH level water (neatly named Alkaline84) is beyond me, but I won't waste time debating the advantages or disadvantages of certain minerals or pH levels because Alkaline84 fails on other levels.
Alkaline84 fails in product strategy; the tout sheet claims selling water in one gallon (or 3-liter) jugs is an advantage because there is no competition. But did it occur to management that there is no competition in this sub-niche because there is no gap in the market for bulk buying plain water?
The effort it would take to carry to 3-liter jug home from a shopping trip simply far outweighs the supposed benefits. Items like Vitamin Water are impulse purchases when on the go, it's a 3-second decision, you walk past a convenience store and grab it on your way to the office or after the gym.
But Alkaline84 has another Achilles' heel, the product proposition is weak: it's water, it looks and tastes exactly like what comes out of my refrigerator for free. The demand for bulk purchases of PH modified water simply does not exist and as we'll see below WTER does not have the marketing budget to create the demand.
Reason 2. The company is vastly overvalued
Using the word valuation is perhaps a disservice to the art of security analysis, but I'll persevere. As of writing WTER has 79,387,175 common shares outstanding which at $0.60 gives us a $47.6 million dollar market capitalization of the common.
In my experience to support such a market cap a company would require roughly $3.8m in net income or $0.048 EPS. What does WTER bring to the table? ahem, here's where things get tricky. WTER has such small income statement numbers that dividing them by the massive 80 million share-count takes the per share numbers into fractions of pennies.
Example: WTER has negative net income so we will obligingly jump up the income statement and take their gross profit in the last quarter. It was a rather pitiful $14,465. yeah that's fourteen thousand dollars. umm, yeah. This isn't EBITDA folks; this is earnings before interest taxes depreciation amortization and pretty much every other expense save for the "electro charged water".
On a per share basis that's $0.000175 in gross profit last quarter. Total revenues? $32,522 (thirty two thousand dollars). I know Amway distributors who gross more than this.
Reason 3. The management are part timers
In an 8-k filed on June 5th the company discloses a bizarre risk factor: the management are part timers.
"Because our officers and directors will not be devoting a majority of their time to our operations and will only be devoting limited amounts of time to our development and operations, completion of our business development may be sporadic and occur at times which are convenient to our officer and director."
Bulls say this company is entering an exciting niche (consumer beverages) that has in recent past been a source of superior stock market returns. The press releases shown in Exhibit A do hint Alkaline84 may be gaining traction which will show in the next quarter. Furthermore if Akaline84 can gain traction the market may reward WTER.OB with a nice multiple.
With that said, I believe the main driver of the recent performance in WTER.OB stock price is the rampant online touting and press releases rather than any fundamental interest in the underlying.
WTER shares have risen from $0.35 to $0.60 based on an explosion of corporate press releases and online tout sheets. Run-rate annual revenues based on the last quarter stand at just $130,000 (one hundred and thirty thousand dollars), which pales in comparison to the $47.6 million dollar valuation the market is currently giving WTER.
Even if WTER was worth 10x revenues or $1,300,000 it is still trading at 37x this overly generous valuation. My advice? Caveat emptor, buyers of WTER are playing musical chairs and you don't want to be around when the music stops.
In just the past 30 days the company has announced: