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Cheap Soda Is Good for You: Under the Radar

Stocks in this article: COT KO PEP

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BOSTON ( TheStreet) -- I recommended that investors purchase shares of discount soda-seller Cott Corp. (COTT) on Aug. 4. Since that recommendation, Cott's shares have jumped 63%. So far this year, Cott has surged more than seven-fold. That rally is fundamentally justified and has further to go.

Cott, which makes RC cola and the Red Rain energy drink, swung to a third-quarter profit of $14 million, or 18 cents a share, from a loss of $88 million, or $1.25 a share, a year earlier. Revenue declined 4% to $405 million, but profit spreads improved. Cott's gross margin rose from 16% to 19% and its operating margin climbed from 2% to 7%.

Recent operating success has strengthened the company's balance sheet. Cott now holds $19 million of cash reserves, translating to an adequate quick ratio of 1. And a debt-to-equity ratio of 0.8 indicates reasonable leverage. Still, we give Cott a financial-strength score of just 2.1 out of 10 due to inconsistent performance.

In 2008, Cott was suffering under restructuring and asset-impairment charges. In the prior year's third-quarter, the company posted an operating loss of $91 million due to impairments. Investors abandoned the stock, questioning not only its investment merits, but its long-term viability.

A fire-sale caused Cott to lose 82% of its market value over the course of a year. The stock bottomed at 66 cents on Oct. 10, 2008. The shares now trade around $9. So if you possessed the insight to buy at the bottom, you'd be up 1,271% now, a respectable return over a one-year period.

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