First of all, for Cheapstocks to take a positive view on a company such as Jones Soda (NASDAQ:JSDA) was a stretch. To actually take a position in this growth stock went far beyond that. We are deep value investors by nature, and paying 100 times earnings for a company that also has a high price/sales multiple, and little in the way of assets goes against our nature. But we bought Jones anyway, placing a high value on the intangibles: brand name, growing recognition, innovation in a somewhat stale industry, and great tasting products.
However, we were perplexed by Jones 12% pop last Friday (12/22), only to find out that it was a Jim Cramer-induced rally. On Mad Money's Thursday edition, Cramer spoke highly of Jones, suggesting for one, that earnings could double next year. This propelled the stock on Friday, amid a frenzy of message board activity. Small investors everywhere wanted to join the party.
We could only shake our heads in disgust. Oh, it's nothing against Jim Cramer, we believe he is not only entertaining, but has a great gut for the market. We wish we were as savvy as Cramer can be. But for one man to have a legitimate and well thought out opinion on literally every stock is hard to imagine. But that's another story.
When Cramer said that he expected earnings to double next year, that should have been the cue for investors to investigate what that statement actually meant. Jones earned $.06 per share in 2005, and is expected to earn the same for 2006 (year ends in late December). The average analyst eps estimate for 2007 is $0.12 per share. So, if earnings did indeed double, Jones would still be trading at 100+ times earnings. Even if the high estimate for 2007 ($0.20) was achieved, the stock still trades at 60X earnings.
Our point is that investors need to do a better job of interpreting what the pundits are saying. Jones earnings had better at least double in order to justify its current price, (as well as its price before Cramer's comments).
We'd love to see Jones go to $20, $30, $50, $100 per share. But not because of hype, not because of "irrational exhuberance," not because small investors are jumping on a bandwagon.
Are we shooting ourselves in the foot with these comments (we hold JSDA)? Maybe. But we are big believers in accurately interpreted information. If Cramer said that Sirius (NASDAQ:SIRI) earnings would double next year, would investors quickly pile into that stock as well, without doing their homework? We hope not. Sirius has no earnings.
JSDA 1-yr chart:
Disclosure: The author has a position in this stock.