Coffee Holding Collapse: Buying Opportunity Or Catalyst To Cut Losses? (NASDAQ:JVA)

Just last November, I wrote an article featuring Coffee Holding Co., Inc. (NASDAQ:JVA). Since then, all manner of chaos has broken loose, as the stock has been trapped into “freefall mode” and has experienced a 45% decline as a consequence. It doesn’t make sense to me, as JVA actually completed its best year in more than a decade, but who am I to argue with the market? The stock hit a new 52-week low of $2.31 last Tuesday, but has seen a slight 8% improvement to $2.49 to close the week.

Be greedy when others are fearful? There is no doubt that there is a lot of fear permeating through this one, but trying to catch the proverbial “falling knife” can be hazardous to your health. It might be more appropriate to begin nibbling once the shares begin to exhibit some sustained high relative strength. Obviously, this strategy creates a higher entry point, but getting the trend in your favor is well worth the added price.

In Fiscal 2021, the coffee purveyor earned $1,255,354 and paid a 7 cent cash dividend to shareholders. Quite impressive, considering they were able to so this right smack dab in a pandemic, as well as the headwinds associated with supply chain issues and harrowing inflation. In any event, “Mr. Market” for one reason or another has taken a very negative view of the company. Could this severe disdain represent a moment of insanity? Is it possible that the brutal beating behind the woodshed went too far? Is this a moment where the astute investor can actually exploit the stock’s inefficiency, in an efficient market?

Questionable calls: the company’s Joint Venture entry with Jordre Well to launch a CBD-infused coffee line hasn’t gone well. After almost one year, the JV hasn’t even hit the $500,000 sales milestone, necessary for Jorde Well to receive their second and final tranche of 139,250 JVA shares. Coffee Holdings originally intended to sell this line to wholesalers and retailers, but it has been relegated to online sales only. It is important to note that the regulatory environment for this product isn’t the best – just 27 states allow CBD commerce.

Family control is limited: CEO Andy Gordon controls 9.10% of the company’s 5,708,599 outstanding shares. This amount, however, includes the option to purchase 349,000 shares at $5.43. Without these options, he owns just 171,416 shares, amounting to a paltry 3% position. His brother, CFO David Gordon, controls a 9.70% slice, but after subtracting his 281,000 hoard of stock options, his real ownership falls to 4.79%. These guys sure seem to have an inordinate influence over the Board of Directors with less than 8% ownership between them. Why is that? Could it be the respect for the founder of the company. I’m hoping the management team eventually changes things around. The old adage “doing the same thing over and over again and expecting different results,” comes to mind.

Second quarter results were horrid: even though they were able to increase sales 14% from $14.47 to $16.50 million, a 6-cent loss was sustained due to a massive gross profit margin deterioration (1240 basis points) from 26.00% to 13.60%. This was mainly attributable to the closure of its Steep N Brew division and corresponding $718,000 obsolete inventory write-off.

Credit facility extended: the company reached their 8th loan amendment on June 28th with Webster Bank. They extended their loan maturity date to June 30th, 2024 and set their interest rate to SOFR plus 1.75%. You have to look at this as a positive, because it implies the lender has confidence in getting their loan paid back. Perhaps Webster Bank sees something in the following metrics providing them with continued confidence:

(1) acid test ratio is 1.29 (2) current ratio is 3.09 (3) debt to equity ratio is .21 (4) debt utilization is 39.30% (company has used $5,900,000 of its $15,000,000 line of credit) (5) cash on hand is $3,025,000 (6) price to tangible book value is .55 (after subtracting $2,488,785 for goodwill) (7) price to sales ratio is .21 (meaning every 2 months, they generate more revenues than their total market cap of $14 million).

OWYN debacle: Borrow to buy $2.50 million of “OWYN”? The Only What You Need plant-based protein drink company? JVA indeed accessed their credit line to make the investment. Why not invest in your own company instead? When will shareholders see a return on this investment and how much will it be? A little transparency here, would go a long way.

The stock is cheap, and a buyback makes sense at this juncture. Why not exploit the low share price and add market confidence at the same time? How could a $1 million share buyback authorization possibly hurt at this juncture?

Management’s second quarter commentary: they claim to have a clear path forward while stressing the following bullet points: (1) focus on unroasted green coffee beans by selling to small and medium roasters; (2) marketing of private label to large wholesalers and retailers; (3) pushing their own legacy brands such as Cafe Caribe, Harmony Bay and S&W premium; (4) they are cautiously optimistic after generating their seventh consecutive month of rising revenues; and (5) they plan on upgrading their La Junta Colorado roasting plant with a $1 million capital infusion.

I’m a big proponent of the ” less is more” school of thought. If they can simplify operations, things will improve. One other idea, they need to update their rather primitive website. It looks like a novice put it together. A more professional look is way overdue and could go a long way rehabilitating the company’s tarnished image.

Bottom line: Third quarter results are still two months away, and I don’t think they will be too encouraging. That being said, we could see a press release issued prior to that time which could give the market the opportunity to get excited. Possible, but not probable news items include: (1) new large customer announcement; (2) OWYN update; (3) Jordre Well news; (4) a stock buyback authorized; and (5) a form 4 SEC filing showing significant insider purchases.

Any type of good news could double the share price, in a matter of minutes. An extended period lacking news, could slowly choke off its lifeblood, too. Those who tend to possess a “glass half full” outlook will be pleased to hear JVA’s risk reward scenario clearly favors the long side. After all, the CEO reiterated the shares were “sorely undervalued.” He did that when the share price was almost double what it is today. If he thought it was undervalued then, I wonder how undervalued he thinks it is today at a mere $14 million market cap?

I was always taught to cut your losses short and let your gains run. The problem is, I have been very poor at implementing this wisdom in the past. It is fair to say, I own way too many shares.