Sunday, January 20

Week 81 - Core US Food and Beverage Companies

Situation: The worldwide food and beverage industry is very mature, very fragmented and very competitive. We need to sort companies into manageable groups to allow analysis of investment potential. We started with those based in the US and came up with a list of 20 noteworthy stocks (see the attached Table). Not all are in the business of producing food and beverages. We’ve included the largest seed company (Monsanto), the largest farm equipment company (John Deere), the largest trucking company dedicated to delivering food products and prepared meals (Sysco) and a freight forwarding company (CH Robinson Worldwide) that delivers its own line of vegetables (The Fresh 1) anywhere in the world that has an air freight terminal. We sorted these 20 companies into two groups of 10 in the Table. The upper group has 5-yr Beta values less than 0.65 and Total Returns during the 18 months of the Lehman Panic that fell less than 65% as far as the S&P 500 Index Total Returns. This leads us to think of those 10 companies as being “bond-like” and having such low risk that there’s no need to hedge an investment in these companies with an equal investment in 10-yr US Treasury Notes, or inflation-protected US Savings Bonds, or a high quality investment-grade intermediate-term bond fund (see Week 76 for more information on hedges). To find substantial risk factors associated with these stocks, you have to look deeper. We have identified what we consider to be some key risk factors and red-flagged values denoting higher risk (see Columns H-M in the Table). Only 3 stocks that have no red flags, and they are the ones with the highest Finance Value (Reward minus Risk: Column E), namely Hormel (HRL), CH Robinson (CHRW) and General Mills (GIS). You can think of these 3 companies as having little uncertainty related to earnings growth going forward. Bottom Line: Food is so essential that the top 10 companies (Table) rival regulated utilities for stability and dependable earnings growth, even though food companies don’t have government-guaranteed credit and return on equity. Risk Rating: 3.

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