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No. of Recommendations: 0

Jones Soda Company [JSDA] is one of the most misunderstood companies with one of the most volatile stock prices I've seen in a while.  It is currently trading at around $2.50 per share, or a market cap of $65M per share.  This stock has become a black sheep thanks for the pumping of Jim Cramer and the lack of financial analysis and understanding of Mr. Market.  It is trading for less than 1/10th of it's 52-week high of $32.60 per share. 

Can you believe even now that Mr. Market is silly enough to believe this company is such a bad deal, yet less than 1 year ago he was more than happy to pay 10x the current price?!!?!?  Mr. Market is insane!  Short of bankruptcy and/or fraud, that's ridiculous!

At these low prices, the valuation metric has changed to identify value.  It should not be PE.  PE is inadequate because it only values earnings.  Jones Soda has none in the last year.  There current projected estimated cash outflows looks a lot more like an early stage startup financed from a VC than a relatively stable publicly traded company.  As, Mr. Market continues to misprice this stock too low [versus too high as was the case earlier], it offers a good deal.  

The biggest component to this low-risk high reward play is the balance sheet.  PE ratio is ignorant of the balance sheet.  This small cap is also very unique in that it has an awesome balance sheet relative to it's size.  As of Q4 2007, this company has $17.8M in cash and equivalents and $9.9M in short-term investments, for what should be considered a total cash position of $27.7M.  That's approximately 42% of the stock price.  For every $1 in JSDA's current share price buys you $.42 of cash...  net that out, and the company's effective market cap is really $38M

Maybe that doesn't sound cheap to you.  Let's try to translate the situation into the "beloved" PE terms.  Maybe you think the expansion plan into cans and other products will fail.  Well, even then, at this point JSDA offers a compelling turnaround story.  For the year ended 2005 when JSDA only had canned soda in limited format in Target stores and their primary product was glass bottled soda/drinks, they squeaked out $.06 EPS.  If you assume their existing business generated just $.06 EPS, or $1.3M that would give today's current price a PE of 29 with those numbers.  At a glance, that PE would be well within reason for a small cap company that has the potential to incrementally grow earnings much easier than a large cap due to it's inherent size.  Very much so if the Seattle Seahawks and New Jersey/Brooklyn Nets sponsorships and advertising expense actually pays off over the next few years...

To me, this is a relatively low risk, high reward price, but one that will take some patience.  You can't tell when and if Mr. Market would warm up to this one... so if you are accustomed to Mr. Market telling you what something is worth... don't touch this one. You will need your wits, patience and a strong sense of discipline at all times if you want any chance of a successful investment from this one.

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