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16 Jun

A Good Ol’ Fashion Growth And Value Play

by

Good morning!

If you’ve given up finding the almost-impossible-to-find value and growth stock, with a potential of being taken over as a ‘kicker’ to this proposition, Castle Brands (ROX) is a stock you should spend some of your valuable time reviewing.

“Castle Brands has completely turned the corner to a profitable enterprise.”

I’ve currently made $40,042.23 realized profit on ROX since my first report back at $.99 on Friday March 12.

Outside of my $42,894.31 profit shorting Snapchat via option puts in the Millionaire Roadmap

… ROX is my single biggest winner in 2017 up well over 100% at the $2.22 highs. I bring this up NOT to brag but to point out I haven’t been wrong about the stock yet and do not believe I’m wrong now.

Okay, enough of past glory.  What now for ROX?  

Well, for starters, we surely got the big selloff/washout in the stock and the rebound I was looking for, all in one week—this week, during the week of the company’s Q4 earnings results.  Therefore, I felt I had to issue a brief, special report about ROX, pronto.

I, again, like ROX as both a Swing trade and Long-term trade at this time.  Occasionally, the stock has good volatility for the Swing trader, and has wonderful fundamentals as a long-term play, as well.  Because the Swing trade element to the stock is chart based and is not the scope of this alert, let me layout the fundamentals of the stock.

On June 15, Castle Brands reported a jump of 7.0% to a record $77.3 million of annual revenue.  Gross profit expanded by 11% to $31.7 million, while net income rose by $2.2 million, to end fiscal 2017 with a $0.5 million net profit, a first profitable year since the company’s inception in 2009.

Adjusted EBITDA soared by 46%.  Nice, and shows good leverage of the company’s P/L.

And in the products categories, revenue of Goslings Stormy Ginger Beer increased 23.3% to $20.0 million, and was a strong bump that was consistent with my expectation, given the Walmart deal in late February, of course  The metrics of Castle Brands’ Jefferson bourbons were also strong, prompting the company to add approximately 3,600 barrels of aged bourbon and begin the process of approximately 6,400 barrels of new fill during the second half of the fiscal year.

Overall, Castle Brands has completely turned the corner to a profitable enterprise.  And the outlook for the company appears very good, maybe better than traders now believe.  With the company’s increase to 80.1% of ownership of its distributor, Grosling-Castle Partners, Castle Brands has achieve vertical integration of the no. 1-selling ginger beer of the U.S.  

Castle Brands’ mention in its news release of its exclusive contract with Grosling-Castle Partners—that won’t expire until January 1, 2031—is a moot point now that Castle Brands has complete control of its distributor.  And with its relationship with Walmart coddled like a newborn baby, it appears Castle Brands has sewn up a moneymaking machine that JD Rockefeller and Warren Buffet can really appreciate.  I certainly appreciate this strategic coup.

While Rockefeller and Buffet wouldn’t be interested in such a ‘small potatoes’ company of only $315 million market capitalization, my readers and I certainly are.  We like playing companies that have not yet grown big enough for the institutional and hedge fund investors to take notice.  In fact, institutions hold a small lead over insider ownership of ROX, 6.3% against 4.4%, respectively.  Let’s see what happens to the share price of ROX when the ‘big boys’ become interested.

In closing, let me get to the punchline of ROX.  

On April 27, Bloomberg reported that Castle Brands is working with financial services firm, Perella Weinberg Partners.  Speculation is, that Castle Brands may be in the process of seeking advice about initiating a buyer of the company.  

Bloomberg penned:

The New York-based company [Castle Brands] is working with advisers at Perella Weinberg Partners on a potential sale, the people said, asking not to be identified as the information is private. Castle Brands may also attract bigger rivals, such as Diageo Plc, the world’s largest distiller, and Pernod Ricard SA, the people said. Heaven Hill Distilleries Inc. may also consider a bid, the people said. Castle Brands had a market value of about $260 million at the close of trading on Tuesday.

No final agreements have been reached and the sale process may not result in a deal, the people said. Representatives for Perella Weinberg, Constellation, Sazerac, Diageo, Pernod Ricard and Heaven Hill declined to comment. Castle Brands didn’t immediately respond to requests.

If you know the spirits industry as know it, collectively, industry giants dominate US market share, and for years have been buying companies like Castle Brands as if these companies are office supplies.  So, either Castle Brands is seeking advice as to the company’s value (or potential future value), or is finding a way to stave off the spirits giants a little while longer, giving the company some more runway to grow and raise the premium paid by a potential suitor.

Essentially, no matter which scenario (or variation) is most plausible, shareholder might one day wake up to a surprise and immediate big ‘score’ in the stock.  This may happen at any time.  In any event, if nothing comes out of Castle Brands’ meetings with Perella Weinberg, ROX is expected to be a winner in both the shorter-term and long term.  

And with the major averages trading near record highs, a good ol’ fashion growth and value play makes a lot of sense at this time, especially when the stock’s price is only pennies higher on the day of the Bloomberg article is taken into consideration.

I’m targeting $2.50 before thinking of selling ROX.  That’s a 35% move higher from Thursday’s closing price of $1.85.

Sincerely,

Jason Bond

Disclosure: I’m long 20,000 shares of ROX looking for the middle $2’s and plan to hold for a few weeks to months unless it gets to the middle $2’s sooner.

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