Sunday, July 24

Week 264 - High-quality Food and Agriculture Companies in the 2016 Barron's 500 List

Situation: The performance of food-related stocks is linked to the commodity supercycle, which has just completed a successful test of its 1998 low. Now would be a good time for you to prepare for the next commodity supercycle. You can buy mining and energy stocks while prices are low, but we’d rather have you think about buying food & agriculture stocks. Why? Because mining and energy stocks carry higher risk, whereas, food is both a daily requirement and in a growth market. This is because the number of people in East Asia alone who can afford to be adequately nourished has been increasing by almost 20 million persons a year for the past 20 yrs. The price of food also faces upward pressure, and is more likely to outstrip general inflation than to continue tracking it. Why? Because agriculture is the greatest consumer of water, and the steady expansion of drought-stricken areas is reducing the inventory of arable land that is able to support agriculture without irrigation.

Mission: Provide an update of food and agriculture companies listed on the New York and Toronto stock exchanges, by referencing the 2016 Barron’s 500 List of the largest companies by revenue. That list ranks companies by fundamental metrics (cash flow from operations, revenue) for the past 3 yrs. We highlight (using green) the companies that have improved their rank (see Table). We also exclude any that do not have an S&P bond rating of at least BBB+ and an S&P stock rating of at least B+/M. Companies with a BBB bond rating are also included if they carry an S&P stock rating of at least A-/M.

Execution: see Table.

Bottom Line: In the aggregate, these 12 companies are good investments. And, they’re safe enough to be long-term holdings in a retirement portfolio. The problem is that you’ll only choose to invest in two or three. To help you pick those, we’ve calculated Net Present Value (NPV) in Column AA of the Table. Ranked by NPV, and also considering safety metrics like Dividend Achiever status, General Mills (GIS), Hormel Foods (HRL) and Deere (DE) look like good bets. 

Risk Rating: 6 (where US Treasuries = 1 and gold = 10).

Full Disclosure: I own shares of GIS, HRL, KO, PEP, ADM, and DE.

NOTE: Metrics are current for the Sunday of publication. Red highlights denote underperformance vs. VBINX at Line 18 in the Table. NPV inputs are described and justified in the Appendix to Week 256. A shorthand way to estimate that a stock will have an investable NPV is highlighted in yellow at Column Q in the Table, i.e., 16-Yr CAGR (Column N) + Dividend Yield (Column G) needs to be 11.4% or higher.

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