Cheap Soda Is Good for You: Under the Radar

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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.

Despite the outstanding rally, Cott is still remarkably cheap relative to its peer group and brand-name pop purveyors Coke ( KO) and Pepsi ( PEP). Based on book value, Cott is 62% cheaper than Coke and 68% cheaper than Pepsi. And when considering sales, Cott is 89% cheaper than Coke and 59% cheaper than Pepsi.

Although I remain optimistic about this stock's potential, I must admit it's finicky. A beta of 2.8 demonstrates above-average volatility. If we suffer a stock-market correction, and investors decide to take profits on Cott, the stock could drop precipitously. We give Cott a volatility score of 2.4 out of 10, less than the "buy"-list average of 4.3.

Our picks from the past three days:
AsiaInfo | Arena | Compass Minerals

-- Reported by Jake Lynch in Boston.

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