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Micro-Cap Monday - Here's How to Profit from Special Booze

By Bill Spencer June 6, 2022 Facebook Logo Twitter Logo Email Logo LinkedIn Logo

Hi there, Big Bill here.

For all intents and purposes, summer has arrived. That means baseball, sun and sand. It means warm evenings.

And summer means snacks and booze. (In fairness to the other seasons – they mean snacks and booze as well.)

Before we dive into today’s micro-cap company, a word please.

Timing and Trend 

As you know, micro-cap stocks tend to be more volatile than their larger-cap cousins. They can swoop and they can swoon. Because they’re also typically thinly-traded issues, they’re difficult or impossible to short. Likewise, you can rarely count on finding tradeable Put options on micro-caps.

For all of these reasons we tend to limit ourselves to playing the upside with micros.

That said, right now we’re in a bear market. All the major indices have fallen by at least 20% from their recent highs.

But bear in mind that even in a bear market, prices don’t fall forever. We always see short-term rallies within the larger down trend. This should shock no one. After all, don’t we see short-term dips during long-term bull markets? Same thing, only different.

My point is, you can play the upside during a bear market. But you need to keep a few things in mind. One, you’re putting on a contrarian or counter trade. So you should accept the fact that the (down) trend is not your friend.

Number two, if you put on a bullish play, betting on an upside move, and you’re wrong, you need to be just as aggressive getting out as you were getting in.

The company you’re about to meet is in a sector that is currently very strong. This stock is gaining institutional sponsorship, and boasts some excellent fundamentals. (The company also just made a very tasty acquisition. More on that in a moment.)

I think we can see gains as high as 117%, if not higher. But, we might not see them right away. This is a stock to keep a close eye on, if you’re uncomfortable playing the counter trend. 

Today’s Mighty Micro-Cap

With a $344 million market cap, Alto Ingredients (ALTO) is the largest producer (and distributor) of specialty alcohols in the U.S. The company produces essential ingredients aimed at four markets: Food and Beverage, Pharmaceutical, Industrial and Renewable Fuels.

In Sector Prophets Pro, our sector research and data platform, ALTO is listed under the Energy Other sector. Currently, Energy Other is ranked #5 out of the 45 sectors we monitor.

We can see that using the Sector Relative Strength (RS) Matrix.

(Click any image to enlarge)

The Energy Other sector’s bullish percent index (BPI) chart, below, shows the percentage of Energy Other stocks currently trading on point-and-figure Buy signals on their own respective price charts.

As you can see, the sector recently came roaring out of oversold territory and is in a towering column of X’s. The BPI is also on a point-and-figure Buy signal. This tells us that the sector should be considered strong over both the short and long terms.

The sector is also strong versus the wider market, as shown on the sector relative strength chart, below. This chart compares the performance of the sector against the performance of the equally weighted S&P 500. Like the BPI, the Energy Other RS chart is in a growing column of X’s and on a Buy signal.

All of this bodes well for a bullish bet on ALTO, especially one with a short-term horizon.

What’s more…

ALTO Meets Demand Across Multiple Industries

According to the company, Alto Ingredients's mission is: “to provide ingredients that make everyday life better.”

The company serves a powerful list of customers, whether in ethanol, dish soap, booze or snacks. With so many of its offerings in the defensive non-cyclical consumer space, I think this company is nicely positioned to weather any economic decline.

As a provider of essential ingredients, ALTO can be thought of as the ultimate pick and shovel play. Their specialty alcohols end up in a dizzying array of products.

What draws my eye toward ALTO is its customer base, which contains such household names as: Nestle, Chevron Corporation, bp, and Church and Dwight, which owns the Arm & Hammer line.

A Tasty Acquisition

On January 18, Alto acquired St. Louis, MO-based Eagle Alcohol Company, LLC for $14.0 million plus an estimated net working capital adjustment of $1.3 million, funded from Alto’s cash on hand.

According to Alto, “Eagle delivers products to customers in the beverage, food, pharma, and related-process industries via its own dedicated trucking fleet and common carrier. 

“Eagle generated over $35 million in revenues in 2021. Eagle is now a wholly owned subsidiary of Alto, and its former president Dan Croghan, will remain with the company and has been named Vice President of Alto and General Manager of Eagle. Croghan and his team bring over 60 years of combined experience and expertise in the chemical and alcohol distribution industry.”

In announcing the deal, Michael Kandris, Alto Ingredients’ President and CEO told investors, “Combining Alto’s low-cost bulk production with Eagle’s differentiated distribution capabilities and customer relationships is expected to lower our exposure to bulk alcohol price volatility, increase our margins, and create new opportunities for organic growth.”

The acquisition is expected to be immediately accretive and grow Adjusted EBITDA by $7 million to $9 million annually in 2023 and beyond, including expected synergies.

Running the Numbers

Alto Ingredients released its Q4 2021 results on April 28. Net sales increased 128.3% year-over-year to $385.49 million. 

Operating income was $37.28 million, which compares very favorably to a $14.23 million operating loss in the prior-year quarter. 

The company reported $36.15 million in net income, compared to a $20.19 million net loss in the fourth quarter of 2020. Earnings per share (EPS) came in at $0.49.

The stock has suffered this year. It’s down -22.76% as of Friday’s close.

That said, ALTO is still up over 280% over the past three years, and over the past year, it’s  formed a very strong base. Remember – “the bigger the breakout.”

What’s Next for ALTO?

Again, we’re in a bear market. The long-term trend is down. Playing the upside is valid, if you keep your head about you and know what you’re getting into.

The big funds have started taking positions in ALTO, which is something we always want to see.

During the most recent quarter, institutions accumulated $32 million worth of ALTO while distributing just $7.89 million – a positive buy/sell multiple of 4.05x.

The stock trades near $4.60 and many funds are prohibited from taking positions until it breaks $5.00. Some funds won’t buy until it reaches $10.00.

If it can hit that $10 threshold we’ll be up +117%. But it bears repeating that right now, playing the upside is a counter trend trade. There’s nothing wrong with that. But if you’re aggressive getting in, be aggressive getting out.

Have a great week!

Bill Spencer

Editor-in-Chief, True Market Insiders

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