Markets

Stephen Gandel is a Bloomberg Gadfly columnist covering equity markets. He was previously a deputy digital editor for Fortune and an economics blogger at Time. He has also covered finance and the housing market.

(Corrected )

This year Wall Street definitely wants seltzer, not salsa.

One of 2017's hottest stocks and unlikely winners is a maker of flavored fizzy water run by an octogenarian CEO known for his quirky press releases. Shares of National Beverage Corp., which makes the popular LaCroix seltzers, have more than doubled this year, rising more than Netflix Inc. and Tesla Inc. combined. Burrito chain Chipotle's stock, on the other hand, is down 26 percent in the past three months.

Bubbly Shares
Shares of LaCroix maker National Beverage Corp. have been a stock market winner this year
Source: Bloomberg

Better-than-expected results for its 2017 fiscal year, which ended in April, recently helped push National Beverage's shares above $100. In an earnings announcement that was more stream of consciousness than press release, CEO Nick Caporella took a swipe at his critics, calling them "cash-poor detractors" and cited innovation like the LaCroix flavor pamplemousse -- French for grapefruit -- and the company's beverages' ability to produce "hydration afterglow" as reason for their success. Caporella said his company was a "financial phenomenon" that happens "when potential is unable to be quantified, but is undergoing excessive growth performance (with no visible end to these remarkable results)."

Nonetheless, there are visible signs that the company's results are starting to lose some of their pop. LaCroix has been a cultural hit. LaCroix art is a thing. Two years ago, the New York Times Magazine published an endorsement, affirming the hip and sensibleness of the product to the millennials who were already picking up boxes of the stuff at Whole Foods. And sales have been off and running ever since.

But that good luck and effortless growth appear to be coming to an end. Shipping costs, for instance, jumped 10 percent in the past year, the first significant increase in five years. Marketing expenses, too, were up 16 percent in the past year after falling for the previous two. Credit Suisse analyst Laurent Grandet thinks LaCroix has most likely reached its maximum store penetration without significantly increasing its merchandising budget. LaCroix is still relatively rare in convenience stories, and that could add more growth. But cracking that market will be costly. And National Beverage's other more cola-like brands, like Shasta, are shrinking.

Cost Containment
LaCroix owner National Beverage has held down expenses, but both marketing and distribution costs rose in the double digits last year.
Source: Corporate filings
Years are fiscal years ending April 30.

And Caporella will have to tackle National Beverage's cost issues at a time when his personal life has become more challenging. In December, two former employees -- pilots of Caporella's company-owned private jet -- filed suits against Caporella and National Beverage, accusing him of sexual assault. The first suit was dismissed. The second, by Terence Huenefeld, also contends Caporella regularly used the company jet for personal purposes and that the company never disclosed that to shareholders, which is required by the Securities and Exchange Commission above a nominal level. A lawyer for Caporella said the cases were filed by two former disgruntled employees and called the accusations "outrageous" and "false." A lawyer for Huenefeld declined to comment.  

LaCroix's shares have a price-to-earnings multiple of 38, based on this year's expected earnings of $126 million, or $2.71 a share. The average of the rest of the market is 19. National Beverage's is higher in part because its earnings per share jumped nearly 75 percent in fiscal 2017. But given rising costs, it's unlikely anything close to that will continue. The average analyst estimate predicts that National Beverage's earnings growth will shrink to 18 percent this year and 17 percent the year after that. Yet the current frothiness of the market overall means that even one-hit seltzer wonders can fizzle for a while before they eventually go flat.

This column does not necessarily reflect the opinion of Bloomberg LP and its owners.

(Corrects the name of the plaintiff in a lawsuit against the chief executive officer and the company in the sixth paragraph. Updates with responses from lawyers for both sides in the case.)

To contact the author of this story:
Stephen Gandel in New York at sgandel2@bloomberg.net

To contact the editor responsible for this story:
Daniel Niemi at dniemi1@bloomberg.net