Sunday, January 26

Week 134 - Food-related Stocks Found in Our Universe of 55 Companies

Situation: Yes, I know. You’d like to put a little zip into your retirement savings by investing in commodities. Here at ITR, retirement is our end-game so we eschew risk. That means we don’t talk about investing in raw commodities through futures or exchange-traded funds (ETFs) like CORN. Instead, we talk about investing in companies that turn those commodities into value-added products. Buying stock in production companies has two advantages over investing in raw commodities: 1) if the raw commodity is rising in price, that increased cost is passed on to the end-user; 2) if the raw commodity is falling in price, that reduction in CGS (cost of goods sold) serves to increase the profit margin. (However, in a competitive environment those savings are passed on to the end-user.) We look at  food-related companies in this week’s blog because we expect world food prices to grow 1-2%/yr faster than world GDP. Other commodity-related investments appear less attractive. For instance, companies that produce fossil fuels are likely to grow slower than world GDP, since growing atmospheric carbon dioxide now has to be mitigated by substituting carbon-neutral energy sources, such as solar, wind, nuclear, hydroelectric, and geothermal. Companies that mine minerals from the ground (or make products from those) are likely to grow with GDP, given the key roles that copper, iron, zinc, nickel, and aluminum play in the building of infrastructure. 

There are three types of companies that support food production. Those that: 
   a) provide inputs to the farm like seeds and fertilizer, 
   b) provide tools for the farmer to use, and 
   c) take farm commodities out to the food chain.

This week’s Table lists 12 stocks that cover all three items listed above. Inputs come from Monsanto (MON), tools come from Deere (DE) and Caterpillar (CAT). Farm products enter the food chain via rail and trucking companies like Canadian National Railway (CNI) and Sysco (SYY). In the United States, almost 40% of corn goes to ethanol producers like Archer Daniels Midland (ADM). Meats are produced by Hormel Foods (HRL); snack food and beverages are produced by Coca-Cola (KO) and PepsiCo (PEP). Much of the final distribution occurs through restaurants like McDonald’s (MCD) and hypermarkets like Wal-Mart Stores (WMT) and Target (TGT). We picked those 12 companies are from our “universe” of 55 high-quality companies (originally 51, see the updated Table for Week 122). “High-quality companies” means those that a) are found on the Barron’s 500 list of companies with the best growth in sales and cash flow over the past 3 yrs; b) have increased dividend payouts for 10 or more consecutive years, e.g. companies called Dividend Achievers by Standard & Poor’s, and c) have a Standard & Poor’s credit rating of A- or higher. Red highlights in the Table denote metrics that underperform our benchmark, Vanguard Balanced Index Fund (VBINX). The history of total returns in Column C goes back to 9/1/00 because that’s when the lowest-cost S&P 500 Index fund (VFINX) peaked before the “dot-com” recession. That Index of price performance remains “underwater” by inflation-adjusted accounting, but on a total return basis (price appreciation plus dividend reinvestment) it has beat inflation (bottom of Column C). 

Bottom Line: Looking at all 6 benchmarks in the Table, and comparing those to the average values for 12 companies in each column, you’ll see that that stock in those companies handily outperforms the benchmarks, in terms of both performance and safety.

Risk Rating: 6

Full Disclosure: I own stock in WMT, MCD, MON, HRL, CNI, KO, PEP, DE, and CAT.

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