Sunday, May 31

Month 107 - A-rated Food & Agriculture-related Companies - May 2020

Situation: Food is an “essential good.” The COVID-19 Pandemic has made us all acutely aware of this, now that we’re being told to shun restaurants and eat at home. But companies that process row crops into breakfast food have faced a topsy-turvy marketing climate in recent years. General Mills (GIS) and Kellogg (K) have had to endure an existential crisis because consumers chose to distance themselves from processed breakfast foods in favor of more nutritious, fresh, and  “organic” offerings. This was partly because fewer families came together each day for a sit-down breakfast. People became concerned about sugars being added to so much of what we eat, as well as the preservatives and obscure ingredients (like dyes) listed on each box of cereal. Debates arose about nutritional value and safety for children. Now, several years after the fact, those former icons of the food industry have admitted their failures and are marketing foods that are demonstrably good for children and contain no obscure or unsafe ingredients. Cereals contain dried strawberries or blueberries, sliced almonds, and other fruits or nuts. Serious investors welcome this state of affairs because changes in consumer behavior create volatility in the market, which translates into opportunity. And who’s to argue against a wider choice of more healthy foods? But for the casual investor, who doesn’t devote hours a week to following the food industry, this is not a good thing. Now is a good time to look at the food and agriculture companies that are left standing. 

Mission: Use our Standard Spreadsheet to analyze food and agriculture-related companies that have an A- or better S&P rating on their bonds, as well as B+/M or better S&P ratings on their stocks.

Execution: See Table.

Administration: Four of the 12 companies appear to offer exceptional value: Coca-Cola (KO), PepsiCo (PEP), Walmart (WMT) and Target (TGT). Those are all Dividend Achievers as well as being listed in the S&P 100 Index (OEF), the Vanguard High Dividend Yield Index (VYM), and the iShares Top 200 Value Index (IWX) (see Columns AL to AO of the Table).

Bottom Line: Companies close to the production of raw commodities have stock prices that tend to follow the commodity cycle, which is dominated by oil. Investors in Deere (DE) and Archer Daniels Midland (ADM) profit if the farmer profits. Investors in food processors and grocery stores face a fickle food consumer, whose only concern is to get the best taste and nutrition per dollar. The companies that have proven they can persevere in that arena are Hormel Foods (HRL), Costco Wholesale (COST), Coca-Cola (KO), Target (TGT), Hershey (HSY), Walmart (WMT), and PepsiCo (PEP). Those companies will still be doing well 10 years from now. 

Risk Rating: 7 (10-yr US Treasury Notes = 1, S&P 500 Index = 5, gold bullion = 10)

Full Disclosure: I dollar-average into COST, UNP, KO, WMT and CAT, and also own shares of DE, BRK-B, TGT and PEP.

The 2 and 8 Club" (CR) 2017 Invest Tune Retire.com All rights reserved.

Post questions and comments in the box below or send email to: irv.mcquarrie@InvestTuneRetire.com

Sunday, April 26

Month 106 - A-rated Value Stocks in the S&P 100 Index - April 2020

Situation: Growth at a reasonable price (GARP) is often mentioned as an investing goal because value underlies the decision to buy. Warren Buffett is the king of value investing and has over $80 Billion in cash (his “elephant gun”) that he’d like to spend. We’re in a Bear Market fueled by the adverse economic consequences of the COVID-19 pandemic. So, he’ll soon spend that cash pile to buy a large company. Let’s look at his options, considering the ways he has prioritized purchases in the past. Firstly, he likes large and long-established companies. Why large companies? Because those have multiple product lines, one of which is usually designed to help the company maintain a stream of revenue during a recession. In addition, those companies are large enough to have the marketing power needed to maintain and grow their brands. 

Mission: Let’s see which choices look attractive among A-rated “haven stocks” in the S&P 100 Index (see Month 104). Remember: These companies reliably pay an above-market dividend, so they’re found in the Vanguard High Dividend Yield Index (VYM), and they’re also listed in the iShares Russell Top 200 Value ETF (IWX). Warren Buffett places high store in companies that don’t overuse debt and also retain Tangible Book Value, so we’ll exclude companies with negative Tangible Book Value that also have a total debt load greater than 2.5 times EBITDA (Earnings Before Interest, Tax, Depreciation & Amortization) or have sold long-term bonds to build more than 50% of their market capitalization. Finally, the company's stock price has to meet both of our two value criteria: 1) Share price isn't more than twice the Graham Number; 2) share price isn't more than 25 times average 7-yr earnings per share. 

Execution: (see Table).

Administration: These 9 companies include 4 from the two most deeply cyclical industries: banks and semiconductor manufacturers. Berkshire Hathaway’s portfolio already includes the 3 banks on the list, i.e., JPMorgan Chase (JPM), U.S. Bancorp (USB), and Wells Fargo (WFC) but doesn’t include the semiconductor manufacturer, Intel (INTC). Berkshire Hathaway is at heart an insurance company, so Warren Buffett always needs to diversify away from the Financial Services industry. There are only 4 non-financial companies on the list: Intel (INTC), Cisco Systems (CSCO), Pfizer (PFE), and Target (TGT), and only TGT is within the price range that Mr. Buffett is looking to spend ($80 to $100 Billion). 

Bottom Line: Target (TGT) appears to be the most attractive company to add to Berkshire’s stable, given that it is priced right and Mr. Buffett already has experience owning companies in the Consumer Discretionary industry.. 

Risk Rating: 7 (where 10-yr U.S. Treasury Notes = 1, S&P 500 Index = 5, and gold = 10).

Full Disclosure: I dollar-average into INTC and JPM, and also own shares of PFE, CSCO, TGT, USB, BLK and WFC.

The 2 and 8 Club" (CR) 2017 Invest Tune Retire.com All rights reserved.

Post questions and comments in the box below or send email to: irv.mcquarrie@InvestTuneRetire.com