Basics of a "Horror Story" Stock
Qualification #1: A company investing aggressively into 2012 end in marketing, headcount, or physical structures. This is happening while it's probable the Street has failed to adjust earnings estimates down to an appropriate baseline (modelers are watching the Fed, come on). Qualification #2: A company that has gotten in the face of Mr. Market to say earnings are at risk, but the market doesn't care today. Qualification #3: There is a disease in the financial statements that will worsen in the medium-term.
How Boston Beer Fills the Glass
- Boston Beer has publicly stated that it is "prepared to forsake earnings in the short-term" to invest. Yet, the stock trades at 25x forward earnings (beyond exorbitant multiple for a packaged food company or a consumer staple, you choose), building in a takeover rumor in the valuation that has been around for as long as I have covered the company (Qualifications #1 and #2).
- The heart of the business, Sam Adams non-seasonal brews, is experiencing waning volume (Qualification #3).
- The gross margin is being eaten by higher costs and unfavorable product mix (Qualification #3).