As Trump Stock Mania Cools, Black Rifle Coffee Stock Has Big Downside Risk

Some may say they have bought Black Rifle Coffee (NYSE:BRCC) due to its high growth potential. But for many, it is the prospect of easy money that has driven them into BRCC stock. That is, the potential for it to go on an incredible run, similar to that of Digital World Acquisition Corp. (NASDAQ:DWAC).

Exterior of Black Rifle Coffee Company Store. BRCC stock.
Source: YuniqueB / Shutterstock

As you likely know, Black Rifle is similar to DWAC in that it has a political angle. Specifically, a Trump-related political angle.

Although the former President, now a budding social media mogul, isn’t directly involved with this coffee purveyor, this company took off in popularity due to its association with the Trumpian political movement during the 2010s.

This former special purpose acquisition company (SPAC) has already seen a partial surge in price. However, with Trump stock mania starting to fade, the hype surrounding this name could begin to fade, as well. Sporting a rich valuation, it has little to fall back on once the market resumes pricing it on fundamentals.

What’s Next for BRCC Stock After The DWAC Stock Selloff

During January and February, Trump-related stocks held up well relative to other types of meme/speculative plays. Due to the launch of Truth Social, which Digital World will acquire once it completes its merger with Trump’s social media venture, DWAC nearly doubled.

Trading for the low-$50s per share in January, earlier this month it was near $100 per share. During this timeframe, BRCC stock has performed strongly. It went from just around its original SPAC price of $10 per share in January to as much as $22.80 per share after its February deSPACing.

But the resiliency of Trump stocks may be starting to cool. The latest stock market sell-off, driven by the conflict in Eastern Europe and the subsequent spike in oil prices, has resulted in a big drop for DWAC stock. It is back to the high-$60s per share. Another name you can consider a “Trump stock,” CF Acquisition Corp. VI (NASDAQ:CFVI), a SPAC that is taking the streaming site Rumble public, has also pulled back.

Black Rifle has declined slightly in recent weeks, although it still has held onto much of its post-SPAC boost. Yet, as the investing trend central to its rise has likely peaked, a further big decline in price may be in store.

Beware of Downside Risk With Black Rifle Coffee

Reiterating a point made in my past coverage of BRCC stock, valuation, not politics, is the main risk with this situation. Instead, as fundamentals come back into focus, there is a risk it won’t sustain its current premium valuation.

What do I mean by premium? The company, which started off as a direct-to-consumer (DTC) coffee company and is now moving into operating its own stores — known as “Outposts” — has a market capitalization of around $3 billion. That is around 14x its projected 2021 sales of $230 million.

By comparison, Dutch Bros (NYSE:BROS), which like Black Rifle is a fast growing coffee company, trades for 4.5x trailing twelve month sales. Sure, you can point to revenue projections for 2022 and 2023 as justification for the company’s higher valuation. But with these projections hinging on growth with its Outpost and wholesale units, as its main segment matures, these numbers are far from being near-certainties.

In other words, a more reasonable valuation should be far closer to the current valuation of BROS stock. So far, the “Trump stocks” phenomenon has delayed this from happening. Yet, as this fad dissipates, expect BRCC to see its valuation contract in a big way.

Avoid if You Don’t Own it, Take The Money and Run if You Do

Some reading this may have had fantastic timing. If you got into it before its deSPACing and before “Trump stock mania” helped it surge, you’re still sitting on some big gains. If you’re in this boat, it is high time to cash in your chips as it remains at around $16 per share.

Black Rifle may not necessarily drop to a point where its valuation — on a price-to-sales (P/S) basis — is equivalent to Dutch Bros. That would mean a more than two-thirds drop in price to around $5.41 per share. But a trip back to below its SPAC offering price, which would be more than 40% decline, seems more than possible.

Clearly, it is best for those holding it to take the money and run. If you haven’t bought BRCC yet, hold off for now. The end of the “Trump stocks” trend could bring with it a big loss for investors buying it today.

On the date of publication, Thomas Niel did not have (either directly or indirectly) any positions in the securities mentioned in this article. The opinions expressed in this article are those of the writer, subject to the InvestorPlace.com Publishing Guidelines.

Thomas Niel, contributor for InvestorPlace.com, has been writing single-stock analysis for web-based publications since 2016.


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