Small-Cap Throwdown: Reeds, Inc. (REED) Analysis

Steve Kanaval  |’s Small-Cap Throwdown is a brand new investment newsletter focused on finding the best underdog stocks you haven’t heard about. It is authored by Wall Street veteran and notorious straight shooter Steve Kanaval in his distinctive style. In each issue, readers can expect Steve to comb through a no-holds-barred melee between a hand-picked group of feisty welterweight title contenders to determine their industry’s king of the ring. The first issue of Small-Cap Throwdown pits the hottest beverage small-cap stocks against each other to find a winner. Here's Steve's take on Reeds, Inc. (REED) and sign-up here for a free issue!

About the Company

Reeds, Inc. (REED) , together with its subsidiaries, develops, manufactures, markets, and sells natural non-alcoholic carbonated soft drinks, Kombucha, candies, and ice creams in the United States, Canada, Europe, and Asia. The products include Reed's ginger brews, Virgil's root beer, cream sodas, and real cola; Dr. Better products, such as ZERO diet sodas; Culture Club Kombucha, a fermented tea; China colas; ginger chews; and Reeds ginger ice creams; Sonoma Sparkler sparkling juices; and coconut water, yogurt, and fresh juices. It also designs and manufactures sparkling juices, waters, and teas and was founded in 1987 and is based in Los Angeles, California.

Why I Like the Stock: Chris Reed is the most laid back CEO you will ever meet. He doesn't pay attention to the daily movements of the stock price and figures if he executes, especially in creating a good product and company culture, he will succeed–and this has worked for many years. He never seems to get too high or low and plows ahead. In a recent interview, he talked about the state of the industry, his company and how cultural changes being exacted by social media are a huge benefit for his company strategy.

In a recent interview, he covered a range of subjects and 3 points to take note regarding the acquisition potential for niche brands, the steady growth in sales he has experienced over the last 10 years and the recent hires of industry experts to surround him.

What Other Analysts Won't Tell You

Few will tell you that Monster Beverage (MNST) has looked at Reed's and kicked the tires. At some point, another public beverage company will buy Reed's because of its audience and the trend to higher priced craft beer and hipster coffee shops. The specialty beverage industry is here and Reeds has yet to be discovered. I expect they will be discovered in 2015, and without the CEO confirming they are having continued talks, it is imminent if you follow beverages.

The question about Chris Reed selling his company will depend on price and timing. You can never predict industry consolidation, but I do know that the current market conditions with stock prices near all-time highs set up all-stock deals across all acquisitions, but some combination of a cash and stock deal is likely too. I see this happening at $8 to $10 depending on what Chris Reed wants to do, and I think the recent hires of senior beverage guys tells this story loudly. He added valuable internal expertise with industry pedigree at the right time.

The company is currently valued at $80M and I expect this deal to happen at $100M, which is (at today's share price) a 20% premium, making the takeover price $7.50. I think Reed will negotiate a slightly better deal at +20% for his shareholders, and he will retire to his love of tennis and operating around the industry edges while he works out a one-year transition term with his suitor. I think this is inevitable and I peg this a 2015 or 2016 event for Reed's, but keep in mind the CEO would never tell a journalist anything regarding takeover information. It would be totally unethical, so this is my speculation that they will be bought out. The only caveat here is that CEO Reed may hold out for deals above $10 per share, which he knows eventually he can get if he continues to execute. I just wonder about the overall market holding up.

What Can Go Wrong in 2015

The worst thing that can happen is the stock just sits and does nothing, ranging day-to-day on low volume, frustrating investors. This can happen without a sale of the company because the stock has been range trading between $4 and $8 for four years now, and unless you play it perfectly around earnings, you have not participated in any of the equity rally going on around you. What you want to happen now is for Chris Reed to negotiate a $10 sale price for Reed's and then make a decision about whomever buys them, but whoever it is will be using inflated share prices in their own company and the best option will be to exit and take the money off the table no matter if that is MNST or someone else.

Steve Kanaval is the author of the upcoming's Small-Cap Throwdown, a premium newsletter designed to help investors identify the best small-cap stocks to add to your portfolio and trading ideas to profit off them. The first issue pits the hottest beverage small-cap stocks against each other to find a winner. Sign-up here for a free issue today!



DISCLOSURE: The views and opinions expressed in this article are those of the authors, and do not represent the views of Readers should not consider statements made by the author as formal recommendations and should consult their financial advisor before making any investment decisions. To read our full disclosure, please go to:


Symbol Name Price Change % Volume
REED Reeds Inc. 2.14 0.05 2.39 26,253
MNST Monster Beverage Corporation 51.23 -0.02 -0.04 3,229,723 Trade



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