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Small Cap Stock Employing Successful Distribution Business Model

KALISPELL, MT / ACCESSWIRE / September 26, 2016 / We are all familiar with brand names such as Guinness Beer, Crown Royal Whiskey, or Captain Morgan's Rum, and while we think of these brands as individual companies, that is not the case. If you were to attempt to invest in Guinness for example, you would find out that they are now a part of Diaego (NYSE: DEO), a company formed from the merger of Guinness and Grand Metropolitan in 1997.

Diaego is using a tried-and-tested idea by employing the distribution business model. The idea is simple; if a store owner needs to stock his shelves with beer and liquor, would they rather contact 20 different vendors, have 20 contracts, 20 deliveries, etc., or would they rather have a one-stop distributor that can handle all their needs? Diaego, with their incredible size and buying power, is able to serve these needs while still maintaining consistent 60% gross margins.

The same distribution model is employed by The Coca-Cola Co. (NYSE: KO), as Odwalla juices, Dasani water, Minute Maid orange juice, and many more brands are all owned and distributed through the same channels. Ever heard of Constellation Brands Inc. (NYSE: STZ)? Next time you have a cold Corona or Modelo in your hand, you may want to; this $32 billion market cap company brings them to you. Looking deeper, you find this business model across a wide variety of industries; Altria Group (NYSE: MO) in tobacco, Harman International Industries (NYSE: HAR) in audio and visual products, and Luxottica Group SpA (NYSE: LUX) in prescription frames and sunglasses.

Changing the Negative Perception of E-Cigarettes:

Recently, the Food and Drug Administration (FDA) enacted a ban on the sale of E-cigarette products to minors citing a survey that showed between 2011 and 2015, E-cigarette use rose from 1.5% to 16% usage among high school students, resulting in 3 million individuals under the age of 18 having vaped in 2015.

This news has gained the majority of the headlines, but it fails to see the upside advantages that E-cigarettes can provide to the millions of combustible cigarette smokers that are already hooked. The FDA sees the two products as one and the same, however, this is unfortunate because more and more studies are showing vaping to be safer, including this one done by the Royal College of Physicians (RCP) which says E-cigarettes are 95% safer than smoking combustible cigarettes.

The RCP were years ahead of the US in declaring that combustible tobacco use was harmful. In 1962 they published a report linking smoking to cardiovascular disease, lung cancer, and chronic bronchitis. In the current report, the RCP goes on to say,

"Large-scale substitution of e-cigarettes, or other non-tobacco nicotine products, for tobacco smoking has the potential to prevent almost all the harm from smoking in society." Continuing, "Promoting e-cigarettes…and other non-tobacco nicotine products as widely as possible, as a substitute for smoking, is therefore likely to generate significant health gains in the UK."

"E-cigarette vapour contains a far less extensive range of toxins, and those present are typically at much lower levels, than in tobacco smoke," the report notes." In normal conditions of use, toxin levels in inhaled e-cigarette vapour are probably well below prescribed threshold limit values for occupational exposure, in which case significant long-term harm is unlikely. Some harm from sustained exposure to low levels of toxins over many years may yet emerge, but the magnitude of these risks relative to those of sustained tobacco smoking is likely to be small….Although it is not possible to quantify the long-term health risks associated with e-cigarettes precisely, the available data suggest that they are unlikely to exceed 5% of those associated with smoked tobacco products, and may well be substantially lower than this figure."

Physicians in the United States are echoing this sentiment with a survey released just last month. The survey, in which 560 physicians participated, showed that over 70% of the 560 doctors indicated that E-cigs could help patients reduce or eliminate smoking.

Small Cap Investing:

"If I was running $1 million today, or $10 million for that matter, I'd be fully invested. Anyone who says that size does not hurt investment performance is selling. The highest rates of return I've ever achieved were in the 1950s. I killed the Dow. You ought to see the numbers. But I was investing peanuts then. It's a huge structural advantage not to have a lot of money. I think I could make you 50 percent a year on $1 million. No, I know I could. I guarantee that.

The universe I can't play in has become more attractive than the universe I can play in. I have to look for elephants. It may be that the elephants are not as attractive as the mosquitoes. But that is the universe I must live in."

- Warren Buffett, discussing the advantages of small-cap stocks

Many of the most successful companies in the world started out as small caps. Legends have been made of the early investors in Coca-Cola. Pennies turned into fortunes; Microsoft (NASDAQ: MSFT) and Wal-Mart (NYSE: WMT) started out as small caps. Small cap stocks do provide for a higher level of risk, but when the correct combination of a good idea, a proven business model, and high margins come to fruition, it can be rewarding.

In fact, looking at historical 80-year returns in the markets; large cap stocks have returned 9.26% annually, while small caps have had an astonishing 15.9% annual rate of return in that same time frame. The Ibbotson study, which looked at the U.S. markets over 70 years, found that small caps outperformed their larger peers 79% of the time over a 15-year period, and 95% of the time over a 20-year period.

A Closer Look at Gilla, Inc. (GLLA):

Recently, an explosive new player in the E-cigarette industry has come onto the scene: Gilla Inc. (OTCQB: GLLA). The company manufactures and distributes generic and premium E-liquid brands, using the same business model as Diaego and Coca-Cola.

Based in the United States, the company has corporate offices in Toronto, Newport Beach and Budapest, while maintaining a manufacturing facility in Daytona Beach, Florida. Offering 14 separate brands in 25 countries, Gilla and their team continue to execute on their long-term goals by regularly signing distribution deals, including new ones in the United Kingdom, The Netherlands, and China just this year.

The company was also working to get ahead of their peers by introducing a whole new series of products before the August deadline by the FDA, which limits the introduction of new products without prior FDA approval. Gilla was able to do this in part because they own their laboratory and production facilities, an integral part of their 62% gross margins last quarter.

In an August interview done by CEOLIVE.TV, Graham Simmonds, chairman and CEO of Gilla, talks extensively about the future of the company, their plans on expansion and where they see the global E-cigarette market going in the next decade. It is an eye-opening interview from an already successful public company executive; one that shows the true global potential of an industry that is growing at 24% CAGR.

To View the CEO Interview directly please visit https://www.youtube.com/watch?v=zuTiwAEoPRw&feature=youtu.be

For additional information on Gilla Inc. please visit http://gilla.com/?page_id=4124.

Conclusion:

The distribution business model is clearly an effective one, especially if a company is able to be the manufacturer of their own products. Cutting out a middleman in most instances can typically increase margins by up to 20%. In an ever-competitive world, this is often the difference between being profitable and not. This is true of large cap stocks as well as small cap stocks, but the above-mentioned historical averages prove that the potential for larger gains do exist within the small cap space. As long as investors do their own due diligence and rely on solid financial reporting, many gems can be found with a market cap under $100 million.

Disclaimer:

Except for the historical information presented herein, matters discussed in this release contain forward-looking statements that are subject to certain risks and uncertainties that could cause actual results to differ materially from any future results, performance or achievements expressed or implied by such statements. Tamarack Advisors is not registered with any financial or securities regulatory authority, and does not provide nor claims to provide investment advice or recommendations to readers of this release. For making specific investment decisions, readers should seek their own advice.

SOURCE: Tamarack Advisors

ReleaseID: 445954

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