In a numbers-oriented column yesterday, I described the remarkable sales growth that kefir maker LifewayFoods (NASDAQ:LWAY) racked up in the quarter just ended -- 30% year on year, excluding the effect of last year's single big, nonrecurring sale to SUPERVALU's (NYSE:SVU) Sav-a-Lot chain. But I also lamented the lack of growth in profits or free cash flow to accompany those revenue gains.
Mr. Market, it appeared, had been thinking along the same lines, not punishing the company overmuch for failing to grow profits but not really rewarding the top-line growth either. Lifeway's stock had sagged, barely propped up by last week's stock market rally, sliding a total of 3.5% in the wake of last Monday's earnings release. That changed today.
Today, Mr. Market threw soulless numbers-based analysis to the wind and began buying Lifeway in a fit of emotional, carefree abandon. The reason: Lifeway may be about to change one fact I cited in yesterday's column, to wit, that "Kefir still isn't quite a household name in the United States." Today, Lifeway announced that it reached the big time, negotiating and making its first shipment of kefir to mega-retailer Target (NYSE:TGT).
Now, from a purely rational, numbers-based perspective, I'm reserving judgment on the import of this news. It certainly takes Lifeway one step closer to nationwide recognition of its product. And since recognition is a prerequisite to making a sale, and making a sale a prerequisite to making a profit on that sale, this is good news for shareholders.
I'm not convinced, however, that it's "bump-the-stock-price-up-33%" good news. After all, we don't yet know what volume of Lifeway's products Target will be carrying, nor how well it will sell to a mass audience once arriving on Target's shelves. And it will be another three months before we begin to see signs of how profitable the deal is to Lifeway.
And yet. and yet. the stock is up 30 odd percent today. The reason for that, dear Fools, is that investing isn't always a numbers game -- a lesson that value investors like myself sometimes have trouble keeping in mind. A large part of investing, especially with small companies with big potential like Lifeway, is emotion. The emotion of optimism from Lifeway investors, reading today's news as proof positive that their company has "made it." And the emotion of terror among the legions of traders who had sold short 14% of Lifeway's shares and are coming to realize the riskiness of their bet.
We've been following Lifeway for a little more than a year now. Read all about the little dairy maker that could in:
- Small Cap, Big Potential , where we laid out the bull case for Lifeway.
- The Making of a Momentum Stock , where we opined on the risks of trading.
- And Volatility as a Way of Life, in which we warned shorts about playing with fire.
Fool contributor Rich Smith owns shares of Lifeway Foods but of no other company mentioned above.
