Jones Soda Popping in 2006

This alert was originally sent to subscribers of TheStreet.com Stocks Under $10 on April 26 at 10:45 a.m. EDT and is being republished as a bonus for TheStreet.com readers. For more information on this newsletter, click here.

The urge to find short-term gains in low-priced stocks is a tempting proposition. However, as Jones Soda's(JSDA Quote) price surge in early April to a 52-week high of $8.60 shows, patience with your holdings can also lead to large gains.

After climbing to a high just under $8 last June, this stock declined and did little until 2006. With that in mind, an update on Jones Soda -- which we recommended that readers take a look at in March 2005 when shares were trading on the over-the-counter bulletin board at $4.73 a share -- is in order now that shares have moved some 50% in 2006.

After a weak first half in 2005, the company is again profitable, and we believe shares are still attractive for purchase by long-term investors. Even so, we are not yet taking any action in the model portfolio, as we will wait for a pullback closer to $7 a share. Shares were recently trading at $8.12.

Jones Soda, which started out as a small beverage company in Seattle, originally marketed itself by having coolers of its soda at sporting events and in fashion stores. The company's odd flavors, such as Green Apple and Berry Lemonade, gave Jones a differentiated product from that of larger carbonated-beverage makers such as Coca-Cola(KO Quote) and Pepsi(PEP Quote), and the company soon found itself gaining popularity among skateboarders and other pop-culture groups.

In 2004 and 2005, Jones began to experience a surge in demand as its soda found its way into large retailers such as Starbucks and Target. Although financial results during this period were uneven, with several advertising and hiring initiatives making it hard for investors and analysts to gauge short-term earnings results, the company's fourth-quarter numbers, reported March 9, tell a compelling story of a stock with plenty of upside to come.

For the fourth quarter, Jones turned in revenue of $8.75 million and pro forma earnings of 2 cents a share. This compares favorably with break-even earnings and revenue of $6.4 million in the year-ago period. Growth in the top line was driven by the company's expansion into Target stores throughout 2005, where it is selling 12-can packs of soda; and by strong sales to its distribution network, which is responsible for getting the product on retailers' shelves. The company was also able to deliver a 90-basis-point year-over-year improvement in gross margins to 36.6%, a solid reflection of strong management execution and a large contributor to its earnings growth.