Does Cott Stock Have Considerable Upside in 2019?

Cott Corporation

Cott Corporation is Barrons stock pick this week, and we’re told their stock looks ready to pop. The pop may not be that significant, but it could foam up a little from here.

The Cott Corporation has been making beverages for almost a century now, founded in 1923 by Solomon Cott and his son Harry. Once famous for their brand of soda pop, with the slogan “it’s Cott to be good,” and supplying the house brand of soda for Sam’s Club, they have been migrating over to the coffee and water business over the last 20 years, and just recently sold off the last remnants of their soda holdings.

The coffee and water business have been expanding over this time, where sales of soda have been falling, so this move looks like a very good one and Cott has actually demonstrated some real vision here when we look back at this transition. Cott has been particularly successful with the business beverage services market, which they are now the leader in, and are also well diversified in the beverage market in both North America and Europe, with 50 manufacturing sites and 370 distribution centers now due to a number of acquisitions.

The numbers are finally in for 2018 for Cott, with its Q4 report being delivered on Feb 22, and in spite of some quarterly numbers that analysts found a little disappointing, 2018 was certainly a better year than 2017, where they booked a tidy profit in comparison to the losses that the company suffered in 2017.

Cott’s stock actually had a very good year in 2017 in spite of posting 3 consecutive quarterly losses, and by the time November came around, when the final quarterly announcement in the calendar year was made, the stock had climbed from the $11.33 it started 2017 at to $14.56 per share. After posting nice results, Cott climbed further to finish the year off at $16.66 for a 46% gain for the year, including hitting an all-time high of $17.62 in December 2017.

This well demonstrates the fact that when we look at quarterly results or even annual results, this does speak to what the future may hold, but only partially, and investors did generally see better times for the company and jumped on board, and were rewarded for their patience.

In spite of good business results throughout 2018, Cott ended up selling off a fair bit over the first for months of the year, and while the next four months saw it make a resurgence, even making it back up to $17.00 last July, it did take a real dip over the rest of the way, as a lot of stocks did, and made it all the way down to $13.44 last December.

We did therefore see a year over year loss of 24% between December 2017 and December 2018, during a period where the company’s business actually went pretty well. This shows that while there are correlations between business performance and stock prices, it is just one of several influencers, although given the choice, we of course prefer a company to do well on the business side than not when its stock gets a haircut of this size.

Stock Prices Look Mostly Well Down the Road

Stock prices are really a lot more about potential growth than how a company is doing lately though, and when we look at year over year quarterly growth, the last 2 quarters really stand out, where negative growth year over year has reared its ugly head. The company has done pretty well but it seems that, from these numbers anyway, this may really be slowing down.

This does at least suggest that 2019 may not be quite the year 2018 was on the business side, and from the perspective of the stock, 2019 is the year that really matters now. 2017 showed us weak business results but the promise of better in 2018, and the stock went up. 2018 saw strong business results but these results were already priced into the stock, and at this point investors were actually looking ahead to the next year, and the next year did not seem to be as promising to them.

This is just one of the many ways that people can get drawn away from the realities of stock performance by looking at fundamental data. Business performance does play a role in all of this but we need to understand that its value is all about future expectations, because that’s why people buy stock, to make money in the future.

We would then have to say that, in spite of Cott moving up pretty nicely from its December low of $13.44 to the $14.99 it currently sits at, representing a 11.5% gain, this stock doesn’t look like it has all that much upside in 2019, from either a fundamental or technical perspective. With the outlook somewhat dimmed, there doesn’t seem to be that much to tell us that it is ready to recapture the losses of the last 8 months. The recent gain is a nice one but has underperformed the market average, and conditions suggest that it could and even perhaps is probable that it could put in some gains from here this year, they may not be all that significant.

Cott’s 2019 Prospects Look Decent, But Not Particularly Spectacular

A stock doesn’t become a weekly stock pick at Barrons because they see it as having a fairly limited upside, and they are throwing around the prospect of a 20% jump from here in 2019. They derive this number from the company’s projected 20% increase in free cash, and while free cash growth is certainly nice, and is correlated with advances in stock prices, the correlation is nowhere near as strong as it would need to be to directly project stock prices from it.

The value from this from a stock perspective is what they may do with this money, and this therefore does count for something, but we also need to realize that this is already well known and therefore priced into the stock already for the most part.

We do look at numbers like this anyway to look to predict where a company’s business performance may be going, and it’s nice to see free cash trending up. Overall, Cott’s prospects here do look fairly good at least, in spite of the current short-term trend towards negative growth.

Cott looks more like a stock you might want to buy on dips though, like those who got in after the selling in the face of their recent fairly disappointing earnings report got released and have earned a tidy short-term profit, or those who bought it after one of its several recent declines bottomed out. 20% more just might be in the cards for 2019 as well, but right now where we sit, it’s more likely that this stock upside potential will be more modest.