I'm Rooting For The Oprah Effect

This past week has been an excellent news period for Smart Balance. The price of a share of its stock reflects the improved news flow. What's new? Here are the announcements:

1. A new credit agreement with relaxed covenants. The company stated they still expect to comply with the old covenant thresholds, but they don't have to. they now have added flexibility to grow. Moody's upgrades to stable.

2. The national roll out of their new milk product. After test marketing in Florida and the Northeast this year, SMBL will go nationwide in 2010. The milk business is considerably larger than the spreads market and provides the opportunity to grow sales, market share in the dairy isle, and profits.

3.Today the company announced an agreement with Bob Greene, Oprah's health and fitness guru, to develop and market Bestlife products. These healthy foods and drinks will carry the endorsement of Greene and, implicitly Oprah. Smart Balance will remain the premium products, with Bestlife a more affordable product line.

4. Steve Hughes, SMBL CEO purchased several thousand shares in the open market. A few days earlier a director did likewise.

All this news is nice and may move the stock upward, which makes me feel good, but Smart Balance is a five year play. If you have patience, I think we'll earn multiples of our investment when Hughes sells his then billion dollar company to a major food company for a considerable sum. I'm willing to wait.

TAKE A HEALTHY BITE OF SMART BALANCE

I've owned SMBL on and off over the past several years. The story hasn't changed, but the share price is inching lower. An opportunity is at hand if you can wait five years. Regardless of the "markets" results, Smart Balance will reach $1 Billion, control a significant share of the dairy case, and sell out for a very nice price.

The "story" is one of smart management that has built brands successfully before. Steve Hughes, SMBL CEO, has been the architect of tremendous brand growth at ConAgra, Dean Foods, and Celestial Seasonings. His team has years of experience and the goal of building SMBL into a billion dollar foods concern. They are currently at the $250MM level after several years of business.

Smart Balance is a BRAND. It doesn't own manufacturing or research facilities. It is product, marketing, and people. It makes a little money and generates cash. Enough to paydown it's acquisition debt to $65MM. They should be debt free in a year or so. The lack of manufacturing is an advantage in our current tough times.

At its current share price of $5.90 the stock can be gathered in at a price that is significantly lower than the IPO price, employee options, and the entry points of some of their largest private equity investors. While it isn't at its 2 years low point, it is well off its highs and hasn't participated in the market's run up.

A reasonable plan is to buy some and tuck it away for 5 years. Forget about what the market price is and let Steve Hughes do his magic. Within that timeframe he'll sell the company and you'll end up with a boatload of ConAgra, Kraft, or Heinz shares. That's my bet anyhow.

Specialty Food Producers Have Been Tasty So Far In 2009

January hasn't been kind to the buy and hold investor. Short selling, put buying, call writing, and, maybe, some savvy trading would have goosed performance.

Besides the For Profit Education stocks that I've written about before and believe to be overvalued, there is another small industry subset that has done well. Specialty Food has done nicely so far this year. I'm not talking the likes of Kellogg, ConAgra, or Pepsi, but their smaller, niche brethren.

Flowers Foods, Diamond Foods, and Smart Balance all have staked out corners of the food industry and dominate their niche. FLO reported today and beat by 3 cents and had a promising outlook. DMND had a similar report about a week ago. SMBL hasn't reported earnings yet, but they haven't pre-announced either. I own all three and wish I owned more at my entry basis. Adding to a position in this market is always dangerous since many brilliant ideas turn into falling knives. If I add more it will probably be FLO as they have the most conservative balance sheet.

It will be interesting to see how these companies perform in a bear market rally. they've done well by me since January and I remain hopeful that they will continue to

be tasty.