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
Showing posts with label food industry. Show all posts
Showing posts with label food industry. Show all posts
Sunday, April 28
Month 94 - Food and Agriculture Companies - Spring 2019 Update
Situation: Investors should pay attention to asset classes that fluctuate in value out-of-sync with the S&P 500 Index. Such asset classes are said to have minimal or negative “correlation” with large-capitalization US stocks. Emerging markets and raw commodities are important examples. Those are a natural pair, given that most countries in the emerging markets group have an economy that is based on the production of one or more raw commodities.
The idea that you can find a safe haven for your savings, one which will allow you to ride out a crash in the US stock market, is a pleasant fiction. Articles in support of that idea are published almost daily. But unless you are a trader who can afford to rent or buy a $500,000 seat on the Chicago Mercantile Exchange, you probably aren’t deft enough to arbitrage the various risks accurately enough before they develop (and at low enough transaction costs) to avoid losing money in a crash.
If you really want to ride out most crashes, invest in a bond-heavy balanced mutual fund that is managed by real humans. The Vanguard Group offers one best, and it comes with very low transaction fees (Vanguard Wellesley Income Fund or VWINX). To refresh yourself on the competitive advantages of investing in food and agriculture companies, see our most recent blog on the subject (see Month 91). To refresh yourself on the competitive disadvantages, study this month’s Table and Bottom Line carefully.
The essential fact is that economies require money for spending and investment. That comes down to having consumers who are confident enough about their employment prospects and entrepreneurs who are confident enough about their ability to invest. Those consumers and entrepreneurs can be relied upon to transfer their successes to the larger economy by saving money, taking out loans, and paying taxes. National economies are interlinked. Because of the size and innovation of its marketplace, the US economy is the main enabler for most of the other national economies. Logic would suggest that the valuation for any asset class will roughly track the ups and downs of the S&P 500 Index, either as a first derivative or second derivative.
Mission: Use our Standard Spreadsheet to analyze US and Canadian food and agriculture companies that carry at least a BBB rating on their bonds (see Column R).
Execution: see Table.
Administration: Of the 25 companies listed in the Table, only one meets Warren Buffett’s criteria of low beta (see Column I), low volatility (Column M), high quality (Column S), strong balance sheet (Columns N-R), and TTM (Trailing Twelve Month) earnings plus mrq (most recent quarter) Book Values that yield a Graham Number which is not far from the stock’s current Price (Column Y). That company is Berkshire Hathaway. We use a Basic Quality Screen that is less stringent as his: 1) an S&P stock rating of B+/M or better (Column S), 2) an S&P bond rating of BBB+ or better (Column R), 3) 16-Yr price volatility (Column M) that is less than 3 times the rate of price appreciation (Column K), and 4) a positive dollar amount for net present value (Column W) when using a 10-Yr holding period in combination with a 10% discount rate (to reflect a 10% Required Rate of Return).
Bottom Line: Only 8 companies on the list pass our Basic Quality Screen (see Administration above): HRL, COST, PEP, KO, DE, FAST, CNI, UNP. At the opposite end of the spectrum, 9 companies have a below-market S&P bond rating of BBB. So, those stocks represent outright gambles.
Aside from Berkshire Hathaway, none of the 25 companies can be said to issue a reasonably priced “value” stock. We’re dealing with 24 “growth” stocks, only a third of which are of high quality. Three of the 9 with BBB bond ratings have high total debt levels relative to EBITDA (see Column O in the Table) that are unprotected by Tangible Book Value (Column P): SJM, MKC, GIS. The good news is that only one of the 9 appears to be overpriced, and that company (MKC) is a quasi-monopoly that has little risk of bankruptcy because it has “cornered” the US spice market.
In summary, you can do well by investing in this space as long as you understand that you’re dealing with a fragmented food industry, one that is flush with companies of dubious quality. You might like to be well-informed about these companies because food, like fuel, is an essential good, and the food industry enjoys steady growth. Why? Because the number of people in Asia & Africa who can afford to consume 50 grams of protein per day grows by tens of millions per year.
Risk Rating: ranges from 6 to 8 (where 10-Yr US Treasury Notes = 1, S&P 500 Index = 5, and gold bullion =10).
Full Disclosure: I dollar-average into TSN, KO and UNP, and also own shares of AMZN, HRL, MO, MKC, BRK-B, CAT and WMT.
"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
The idea that you can find a safe haven for your savings, one which will allow you to ride out a crash in the US stock market, is a pleasant fiction. Articles in support of that idea are published almost daily. But unless you are a trader who can afford to rent or buy a $500,000 seat on the Chicago Mercantile Exchange, you probably aren’t deft enough to arbitrage the various risks accurately enough before they develop (and at low enough transaction costs) to avoid losing money in a crash.
If you really want to ride out most crashes, invest in a bond-heavy balanced mutual fund that is managed by real humans. The Vanguard Group offers one best, and it comes with very low transaction fees (Vanguard Wellesley Income Fund or VWINX). To refresh yourself on the competitive advantages of investing in food and agriculture companies, see our most recent blog on the subject (see Month 91). To refresh yourself on the competitive disadvantages, study this month’s Table and Bottom Line carefully.
The essential fact is that economies require money for spending and investment. That comes down to having consumers who are confident enough about their employment prospects and entrepreneurs who are confident enough about their ability to invest. Those consumers and entrepreneurs can be relied upon to transfer their successes to the larger economy by saving money, taking out loans, and paying taxes. National economies are interlinked. Because of the size and innovation of its marketplace, the US economy is the main enabler for most of the other national economies. Logic would suggest that the valuation for any asset class will roughly track the ups and downs of the S&P 500 Index, either as a first derivative or second derivative.
Mission: Use our Standard Spreadsheet to analyze US and Canadian food and agriculture companies that carry at least a BBB rating on their bonds (see Column R).
Execution: see Table.
Administration: Of the 25 companies listed in the Table, only one meets Warren Buffett’s criteria of low beta (see Column I), low volatility (Column M), high quality (Column S), strong balance sheet (Columns N-R), and TTM (Trailing Twelve Month) earnings plus mrq (most recent quarter) Book Values that yield a Graham Number which is not far from the stock’s current Price (Column Y). That company is Berkshire Hathaway. We use a Basic Quality Screen that is less stringent as his: 1) an S&P stock rating of B+/M or better (Column S), 2) an S&P bond rating of BBB+ or better (Column R), 3) 16-Yr price volatility (Column M) that is less than 3 times the rate of price appreciation (Column K), and 4) a positive dollar amount for net present value (Column W) when using a 10-Yr holding period in combination with a 10% discount rate (to reflect a 10% Required Rate of Return).
Bottom Line: Only 8 companies on the list pass our Basic Quality Screen (see Administration above): HRL, COST, PEP, KO, DE, FAST, CNI, UNP. At the opposite end of the spectrum, 9 companies have a below-market S&P bond rating of BBB. So, those stocks represent outright gambles.
Aside from Berkshire Hathaway, none of the 25 companies can be said to issue a reasonably priced “value” stock. We’re dealing with 24 “growth” stocks, only a third of which are of high quality. Three of the 9 with BBB bond ratings have high total debt levels relative to EBITDA (see Column O in the Table) that are unprotected by Tangible Book Value (Column P): SJM, MKC, GIS. The good news is that only one of the 9 appears to be overpriced, and that company (MKC) is a quasi-monopoly that has little risk of bankruptcy because it has “cornered” the US spice market.
In summary, you can do well by investing in this space as long as you understand that you’re dealing with a fragmented food industry, one that is flush with companies of dubious quality. You might like to be well-informed about these companies because food, like fuel, is an essential good, and the food industry enjoys steady growth. Why? Because the number of people in Asia & Africa who can afford to consume 50 grams of protein per day grows by tens of millions per year.
Risk Rating: ranges from 6 to 8 (where 10-Yr US Treasury Notes = 1, S&P 500 Index = 5, and gold bullion =10).
Full Disclosure: I dollar-average into TSN, KO and UNP, and also own shares of AMZN, HRL, MO, MKC, BRK-B, CAT and WMT.
"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, January 27
Month 91 - Food and Agriculture Companies - Winter 2019 Update
Situation: We all have to eat, so food is an essential good. Even in a commodity bear market, the valuations of food and agriculture companies will likely hold up better than the S&P 500 Index ETF (SPY - see Column D in this month’s Table). Which is amazing, given that grains and livestock account for 29% of the Bloomberg Commodity Index. Another way of saying this is that the volumes of food sold are inelastic, much like gasoline. This gives investments in food and agriculture companies a special, almost unique, competitive advantage.
The most important development in recent years is that the sugar in corn kernels is being processed into ethanol for gasoline. And, to a lesser extent, soybean oil is being processed into diesel fuel (see Week 364). Two US companies are leaders in biofuels production, i.e., Valero (VLO) with a capacity of 1.4 billion gallons per year, and Archer Daniels Midland (ADM) with a capacity of 1.6 billion gallons per year. Animal feeds are an important by-product of ethanol production, marketed as dry and wet distiller grains, that capture 40% of the energy in a kernel of corn.
Mission: Use our Standard Spreadsheet to highlight important metrics for listed companies in the Food and Agriculture sector.
Execution: see Table.
Administration: The 21 companies in the Table meet specific standards for quality, which are: S&P Bond Rating of BBB or better; S&P Stock Rating of B+/M or better; and trading records that extend for 16+ years to allow analysis by the BMW Method.
Bottom Line: In the aggregate, common stocks of these companies look to be a good bet (see Line 23 in the Table). Don’t be fooled. Eight of the 21 stocks track the ups and downs of futures markets in raw commodities (see red highlighted companies at the bottom of Column D in the Table). To build a position in any of those stocks you’ll need to employ dollar-cost averaging. And, only the two companies at the top of the Table have clean Balance Sheets (see Columns N-Q in the Table).
To invest successfully in this sector, you’ll need to do a lot of research on a continuing basis. For example, note that fertilizer companies and seed companies are missing from the Table. Why? Because of the recent wave of mergers and acquisitions. If you had been an investor in now extinct companies like Monsanto, duPont, Dow Chemical, Potash Corporation of Saskatchewan, and Agrium, you’ll have gained from the pain but also lost money.
Risk Rating: 8 (where 10-Yr US Treasury Notes = 1, S&P 500 Index = 5, and gold bullion = 10)
Full Disclosure: I dollar-average into TSN, KO, CAT, UNP and WMT, and also own shares of HRL and MKC.
The most important development in recent years is that the sugar in corn kernels is being processed into ethanol for gasoline. And, to a lesser extent, soybean oil is being processed into diesel fuel (see Week 364). Two US companies are leaders in biofuels production, i.e., Valero (VLO) with a capacity of 1.4 billion gallons per year, and Archer Daniels Midland (ADM) with a capacity of 1.6 billion gallons per year. Animal feeds are an important by-product of ethanol production, marketed as dry and wet distiller grains, that capture 40% of the energy in a kernel of corn.
Mission: Use our Standard Spreadsheet to highlight important metrics for listed companies in the Food and Agriculture sector.
Execution: see Table.
Administration: The 21 companies in the Table meet specific standards for quality, which are: S&P Bond Rating of BBB or better; S&P Stock Rating of B+/M or better; and trading records that extend for 16+ years to allow analysis by the BMW Method.
Bottom Line: In the aggregate, common stocks of these companies look to be a good bet (see Line 23 in the Table). Don’t be fooled. Eight of the 21 stocks track the ups and downs of futures markets in raw commodities (see red highlighted companies at the bottom of Column D in the Table). To build a position in any of those stocks you’ll need to employ dollar-cost averaging. And, only the two companies at the top of the Table have clean Balance Sheets (see Columns N-Q in the Table).
To invest successfully in this sector, you’ll need to do a lot of research on a continuing basis. For example, note that fertilizer companies and seed companies are missing from the Table. Why? Because of the recent wave of mergers and acquisitions. If you had been an investor in now extinct companies like Monsanto, duPont, Dow Chemical, Potash Corporation of Saskatchewan, and Agrium, you’ll have gained from the pain but also lost money.
Risk Rating: 8 (where 10-Yr US Treasury Notes = 1, S&P 500 Index = 5, and gold bullion = 10)
Full Disclosure: I dollar-average into TSN, KO, CAT, UNP and WMT, and also own shares of HRL and MKC.
"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
Post questions and comments in the box below or send email to: irv.mcquarrie@InvestTuneRetire.com
Sunday, July 29
Week 369 - High Quality Producers & Transporters of Industrial Commodities in the 2017 Barron’s 500
Situation: Here in the U.S., debt/capita is growing at an alarming rate and is now greater than $60,000. U.S. Government debt is almost $20 Trillion and has been growing at a rate of 5.5%/yr (i.e., twice as fast as inflation) since 1990. By 2020, the Federal budget deficit will start to exceed $1 Trillion/Yr and the dollar’s status as the world’s reserve currency will be threatened. The gold reserves that stand behind the U.S. dollar (currently worth ~$185 Billion) would have to be increased on a regular basis, as would foreign currency reserves (currently worth ~$125 Billion)
The US economy is no longer capable of growing fast enough to balance the budget for even a single year, without introducing draconian measures. Nonetheless, it is worth noting that those can be effective given that Greece appears to have emerged from that process successfully. But the U.S. could not go through that process and still remain the “top dog” militarily. So, the trade-weighted value of the U.S. dollar will fall at some point, and we will no longer be able to afford imported goods and services. Before that happens, U.S. citizens will need to gradually move their retirement savings into commodity-related investments, as well as bonds and stocks issued in reserve currencies other than the U.S. dollar.
Mission: Use our Standard Spreadsheet to highlight large U.S. and Canadian companies that produce, refine and transport raw commodities, i.e., materials that are extracted from the ground. Select such companies from the 2017 Barron’s 500 list, but exclude any that issue bonds with an S&P rating lower than A- or stocks with an S&P rating lower than B+/M.
Execution: see Table.
Administration: The S&P Commodity Index has the following components and weightings:
Natural Gas (17.66%)
Unleaded Gas (12.16%)
Heating Oil (12.13%)
Crude Oil (11.41%)
Wheat (5.15%)
Live Cattle (4.87%)
Corn (4.48%)
Coffee (3.88%)
Soybeans (3.84%)
Sugar (3.80%)
Silver (3.67%)
Copper (3.39%)
Cotton (3.22%)
Soybean Oil (2.98%)
Cocoa (2.79%)
Soybean Meal (2.57%)
Lean Hogs (2.04%)
53.36% of the index represents petroleum products, 32.71% represents row crops, 7.06% represents industrial metals, and 6.91% represents live animals. Ground has to be mined, drilled, or planted & harvested with the help of heavy equipment to yield raw commodities. Those have to be transported by barge, rail, truck, or pipeline before being processed for market.
We find 8 companies that warrant inclusion in this week’s Table. Seven are obviously appropriate, but the presence of Berkshire Hathaway (BRK-B) needs some explanation (unless you already know it owns the Burlington Northern & Santa Fe railroad). Berkshire Hathaway is the largest shareholder of Phillips 66 (PSX), which has 13 oil refineries and supplies diesel for the largest marketing outlet of that fuel: Pilot Flying J Centers LLC. Berkshire Hathaway purchased 38.6% of that company’s stock on October 3, 2017, and plans to increase its stake in 2023 to 80%.
Bottom Line: Commodity futures haven’t been a good investment, given that their aggregate value is back to where it was 25 years ago, given that the most recent 20-year supercycle recently finished and another is just starting. Nonetheless, the companies that produce, process, and transport those commodities did well over those 25 years (see Column AB in Table). The problem is the volatility of their stocks (see Column M in the Table), and the extent to which their stocks get whacked when commodities become oversupplied relative to demand (see Column D in the Table). If you choose to own shares in these companies (aside from CNI, BRK-B and perhaps UNP), you’d be flat-out gambling.
Risk Rating: 7-9 (where US Treasury Notes = 1, S&P 500 Index = 5, and gold bullion = 10)
Full Disclosure: I dollar-average into UNP, ADM, CAT and XOM, and also own shares of CNI and BRK-B.
"The 2 and 8 Club" (CR) 2018 Invest Tune Retire.com All rights reserved.
Post questions and comments in the box below or send email to: irv.mcquarrie@InvestTuneRetire.com
The US economy is no longer capable of growing fast enough to balance the budget for even a single year, without introducing draconian measures. Nonetheless, it is worth noting that those can be effective given that Greece appears to have emerged from that process successfully. But the U.S. could not go through that process and still remain the “top dog” militarily. So, the trade-weighted value of the U.S. dollar will fall at some point, and we will no longer be able to afford imported goods and services. Before that happens, U.S. citizens will need to gradually move their retirement savings into commodity-related investments, as well as bonds and stocks issued in reserve currencies other than the U.S. dollar.
Mission: Use our Standard Spreadsheet to highlight large U.S. and Canadian companies that produce, refine and transport raw commodities, i.e., materials that are extracted from the ground. Select such companies from the 2017 Barron’s 500 list, but exclude any that issue bonds with an S&P rating lower than A- or stocks with an S&P rating lower than B+/M.
Execution: see Table.
Administration: The S&P Commodity Index has the following components and weightings:
Natural Gas (17.66%)
Unleaded Gas (12.16%)
Heating Oil (12.13%)
Crude Oil (11.41%)
Wheat (5.15%)
Live Cattle (4.87%)
Corn (4.48%)
Coffee (3.88%)
Soybeans (3.84%)
Sugar (3.80%)
Silver (3.67%)
Copper (3.39%)
Cotton (3.22%)
Soybean Oil (2.98%)
Cocoa (2.79%)
Soybean Meal (2.57%)
Lean Hogs (2.04%)
53.36% of the index represents petroleum products, 32.71% represents row crops, 7.06% represents industrial metals, and 6.91% represents live animals. Ground has to be mined, drilled, or planted & harvested with the help of heavy equipment to yield raw commodities. Those have to be transported by barge, rail, truck, or pipeline before being processed for market.
We find 8 companies that warrant inclusion in this week’s Table. Seven are obviously appropriate, but the presence of Berkshire Hathaway (BRK-B) needs some explanation (unless you already know it owns the Burlington Northern & Santa Fe railroad). Berkshire Hathaway is the largest shareholder of Phillips 66 (PSX), which has 13 oil refineries and supplies diesel for the largest marketing outlet of that fuel: Pilot Flying J Centers LLC. Berkshire Hathaway purchased 38.6% of that company’s stock on October 3, 2017, and plans to increase its stake in 2023 to 80%.
Bottom Line: Commodity futures haven’t been a good investment, given that their aggregate value is back to where it was 25 years ago, given that the most recent 20-year supercycle recently finished and another is just starting. Nonetheless, the companies that produce, process, and transport those commodities did well over those 25 years (see Column AB in Table). The problem is the volatility of their stocks (see Column M in the Table), and the extent to which their stocks get whacked when commodities become oversupplied relative to demand (see Column D in the Table). If you choose to own shares in these companies (aside from CNI, BRK-B and perhaps UNP), you’d be flat-out gambling.
Risk Rating: 7-9 (where US Treasury Notes = 1, S&P 500 Index = 5, and gold bullion = 10)
Full Disclosure: I dollar-average into UNP, ADM, CAT and XOM, and also own shares of CNI and BRK-B.
"The 2 and 8 Club" (CR) 2018 Invest Tune Retire.com All rights reserved.
Post questions and comments in the box below or send email to: irv.mcquarrie@InvestTuneRetire.com
Sunday, June 24
Week 364 - Ethanol Producers
Situation: “Market research analysts at Technavio have predicted that the global bio-fuels market will grow steadily at a CAGR of almost 6% by 2020”. But arguments against blending ethanol with gasoline are building. In 2016, 15.2 billion gallons were produced at 214 plants, with Archer Daniels Midland (ADM), Valero Energy (VLO) and Green Plains Renewable Energy (GPRE) being the main publicly-traded producers. For example, those 3 companies operate 4 ethanol plants in Nebraska that together produced 2.2 billion gallons, representing 31% of the state’s crop. Not only is fuel a big business for the agriculture sector, but the by-product (“distillers grains”) is a rich source of animal feed. For every ton of ethanol produced, there are 0.24 tons of distillers grains.
You need to think of ethanol plants as a permanent feature of the Corn Belt, i.e., the 11 states of the Upper Midwest. Government subsidies for ethanol plants in Europe and the United States aren’t going away, for two important reasons. Ethanol is a renewable fuel, and adding it to gasoline makes tailpipe emissions less damaging to the atmosphere. Furthermore, ethanol plants represent the only stable market for the dominant farm product of those 11 states (North Dakota, South Dakota, Nebraska, Kansas, Minnesota, Iowa, Missouri, Wisconsin, Illinois, Indiana, and Ohio). But, before you buy shares in one of the 6 companies we highlight here, you need to understand a number of factors that impact the feedstocks and ultimate markets served by those plants. Start by reading this summary prepared for Green Plains (GPRE) investors.
Mission: Analyze the 6 publicly-traded US companies in the ethanol business, using our Standard Spreadsheet.
Execution: see Table.
Administration: Ethanol plants have changed the lives of farmers in the Corn Belt from being a speculator to being a professional businessman. Iowa, the state that produces the most corn, almost exclusively grows #2 field corn destined for ethanol plants. 20% of that corn becomes “distillers grains”, and dry distillers grains are shelf-stable and greatly valued as animal feed all over the world. So, that’s a stable and global market. And, ethanol is increasingly being shipped out of the US, either separately or blended with gasoline. For example, China recently adopted the same 10% ethanol content requirement for gasoline that the US has been using. That is seen as an export opportunity for US ethanol plants.
Bottom Line: Corn Belt = ethanol plants. That’s the equation you need to remember. It’s all based on #2 field corn. The #1 sweet corn that we like to eat is rarely grown in the Corn Belt. A state outside the Corn Belt (Washington) is the leading producer. But it’s only been 11 years since the Bush Administration pushed Congress to blend 10% ethanol with gasoline. Yes, hundreds of ethanol plants were built as a result but the economics of running those plants is only now being sorted out. If you invest in any those, you’re a speculator by definition.
Addendum: Here’s the definition of a red line for “speculation” given in the May 28, 2018 Bloomberg Businessweek on page 8: “...a conservative threshold for volatility, typically lower than that of the broader market for relevant assets…” Column M in all of our tables lists the 16-year volatility of each company (with the required trading record) and highlights in red those that have a greater volatility than the Dow Jones Industrial Average (DIA). Of the 6 companies in this week’s Table, even Archer Daniels Midland (ADM), the longest-established (and highest rated by S&P) company, has a volatility well above that of DIA.
Risk Rating: 8 (where US Treasury Notes = 1, S&P 500 Index = 5, and gold bullion = 10)
Full Disclosure: I dollar-average into Archer Daniels Midland (ADM), which is a member of “The 2 and 8 Club” (Extended Version; see Week 362).
"The 2 and 8 Club" (CR) 2018 Invest Tune Retire.com All rights reserved.
Post questions and comments in the box below or send email to: irv.mcquarrie@InvestTuneRetire.com
You need to think of ethanol plants as a permanent feature of the Corn Belt, i.e., the 11 states of the Upper Midwest. Government subsidies for ethanol plants in Europe and the United States aren’t going away, for two important reasons. Ethanol is a renewable fuel, and adding it to gasoline makes tailpipe emissions less damaging to the atmosphere. Furthermore, ethanol plants represent the only stable market for the dominant farm product of those 11 states (North Dakota, South Dakota, Nebraska, Kansas, Minnesota, Iowa, Missouri, Wisconsin, Illinois, Indiana, and Ohio). But, before you buy shares in one of the 6 companies we highlight here, you need to understand a number of factors that impact the feedstocks and ultimate markets served by those plants. Start by reading this summary prepared for Green Plains (GPRE) investors.
Mission: Analyze the 6 publicly-traded US companies in the ethanol business, using our Standard Spreadsheet.
Execution: see Table.
Administration: Ethanol plants have changed the lives of farmers in the Corn Belt from being a speculator to being a professional businessman. Iowa, the state that produces the most corn, almost exclusively grows #2 field corn destined for ethanol plants. 20% of that corn becomes “distillers grains”, and dry distillers grains are shelf-stable and greatly valued as animal feed all over the world. So, that’s a stable and global market. And, ethanol is increasingly being shipped out of the US, either separately or blended with gasoline. For example, China recently adopted the same 10% ethanol content requirement for gasoline that the US has been using. That is seen as an export opportunity for US ethanol plants.
Bottom Line: Corn Belt = ethanol plants. That’s the equation you need to remember. It’s all based on #2 field corn. The #1 sweet corn that we like to eat is rarely grown in the Corn Belt. A state outside the Corn Belt (Washington) is the leading producer. But it’s only been 11 years since the Bush Administration pushed Congress to blend 10% ethanol with gasoline. Yes, hundreds of ethanol plants were built as a result but the economics of running those plants is only now being sorted out. If you invest in any those, you’re a speculator by definition.
Addendum: Here’s the definition of a red line for “speculation” given in the May 28, 2018 Bloomberg Businessweek on page 8: “...a conservative threshold for volatility, typically lower than that of the broader market for relevant assets…” Column M in all of our tables lists the 16-year volatility of each company (with the required trading record) and highlights in red those that have a greater volatility than the Dow Jones Industrial Average (DIA). Of the 6 companies in this week’s Table, even Archer Daniels Midland (ADM), the longest-established (and highest rated by S&P) company, has a volatility well above that of DIA.
Risk Rating: 8 (where US Treasury Notes = 1, S&P 500 Index = 5, and gold bullion = 10)
Full Disclosure: I dollar-average into Archer Daniels Midland (ADM), which is a member of “The 2 and 8 Club” (Extended Version; see Week 362).
"The 2 and 8 Club" (CR) 2018 Invest Tune Retire.com All rights reserved.
Post questions and comments in the box below or send email to: irv.mcquarrie@InvestTuneRetire.com
Sunday, December 17
Week 337 - Agriculture-related Companies in “The 2 and 8 Club” (Extended Version)
Situation: We’ve narrowed our “universe” to large & established US companies that reliably pay a good & growing dividend, and called it The 2 and 8 Club. Why? Because “good ” means 2% or better and “growing” means 8% or better. We use a wash/rinse/repeat method to find those companies.
In the “wash” cycle, we collect companies that are listed at each of the 3 online spreadsheets we value: 1) The capitalization-weighted FTSE High Dividend Yield Index for US companies, which is simply the 400 companies in the Vanguard High Dividend Yield ETF. 2) The S&P 100 Index, which has the advantage of price discovery through the requirement that stocks in these large companies have active markets in Put and Call Options. 3) The BMW Method List of statistical data for stocks that have been traded on a public exchange for at least 16 years.
In the “rinse” cycle, we look up information online about each stock that passed through the wash: 1) We make sure bonds issued by that company have an S&P Rating of A- or better. 2) We make sure stocks issued by that company have an S&P Rating of B+/M or better (go to your broker’s website). 3) We make sure the company’s annual dividend payout has been growing 8% or faster over the past 5 years, i.e., we get a list of payouts from the relevant Yahoo Finance page then put the most recent year’s payout and the payout for 5 years ago into a Compound Annual Growth Rate calculator.
In the “repeat” cycle, we take the same steps 3 months later, then select stocks to add or delete by using a brokerage that charges you a flat fee of ~1% of Net Asset Value/yr. This allows you to trade without incurring transaction costs (including dividend reinvestment).
If you’re a glutton for punishment, you can extend your oversight beyond S&P 100 stocks to include those on the Barron’s 500 List, published each year in May, which has the advantage of ranking companies by using 3 cash flow metrics. Then you’ll be running the Extended Version of The 2 and 8 Club, which currently has 32 companies (see Table for Week 329). This week’s blog drills down on the 10 companies in the Extended Version that ultimately depend on feedstocks provided by farmers, to ultimately market foods & beverages, motor engine fuels, animal feed, cigarettes, cotton shirts, and plastics made from corn.
Mission: Set up a Standard Spreadsheet of those 10 companies.
Execution: see Table.
Administration: Farmers operate a capital-intensive business that requires large-scale production on ~1000 acres to justify the cost of chemicals and fertilizer plus the main cost, which is for the purchase and maintenance of equipment (e.g. combines, tractors, grain carts, center-pivot irrigation systems, sprayers, semi-tractors that haul 30 tons of grain, grain-drying bins, grain storage bins, and satellite navigation links needed for weather forecasting and precision agriculture). Their mobile powered equipment requires diesel fuel, and their grain-drying bins require natural gas or propane.
Archer-Daniels-Midland is the only pure Ag company on the list. ADM collects crops at railheads for further shipment and initial processing, and distributes products worldwide. Much of that distribution begins by loading grain onto barges in the Mississippi River.
Weather is the key variable. The software and hardware on weather satellites is IBM gear, and IBM owns The Weather Channel. GPS-based software is an important part of precision agriculture, and similarly depends on satellites running IBM equipment. Cummins (CMI) and Caterpillar (CAT) provide diesel engines, and ExxonMobil (XOM) is one of the largest sources of diesel fuel. CAT also makes skid-loaders and backhoe/end-loaders that some farmers use.
PepsiCo (PEP) and Coca-Cola (KO) process a variety of farm products (including milk, cheese, oranges, oats, coffee and tea) into dozens of branded foods and beverages that are found worldwide. Altria Group (MO) processes tobacco plants into cigarettes and smokeless tobacco for the US market. VF Corporation (VFC) is the largest company that fabricates clothing for a variety of markets, and depends on farmers to produce its main feedstock (cotton). Target (TGT) markets clothing, and Super Target stores offer a large variety of foods and beverages.
Bottom Line: Farm incomes have fallen 20%/yr over the last 3 years, but appear to have stabilized with this year’s harvest. Cost-cutting and scaling-up are the main survival strategies. Farms that are large enough to sustain a family are multi-million dollar enterprises that cultivate more than a square mile of ground. When farmers are forced to cut costs, suppliers are forced into being acquired by (or merged with) other companies. To further complicate matters, efficient transportation networks now circle the planet. The supply of crop commodities outstrips demand enough that the effects of drought or war in one place are mitigated by bumper crops in another place.
Risk Rating: 8 (where 10-yr Treasury Notes = 1, S&P 500 Index = 5, gold bullion = 10).
Full Disclosure: I dollar-cost average into KO, XOM, and IBM, and also own shares of CAT and MO.
"The 2 and 8 Club" (CR) 2017 Invest Tune Retire.com
Post questions and comments in the box below or send email to: irv.mcquarrie@InvestTuneRetire.com
In the “wash” cycle, we collect companies that are listed at each of the 3 online spreadsheets we value: 1) The capitalization-weighted FTSE High Dividend Yield Index for US companies, which is simply the 400 companies in the Vanguard High Dividend Yield ETF. 2) The S&P 100 Index, which has the advantage of price discovery through the requirement that stocks in these large companies have active markets in Put and Call Options. 3) The BMW Method List of statistical data for stocks that have been traded on a public exchange for at least 16 years.
In the “rinse” cycle, we look up information online about each stock that passed through the wash: 1) We make sure bonds issued by that company have an S&P Rating of A- or better. 2) We make sure stocks issued by that company have an S&P Rating of B+/M or better (go to your broker’s website). 3) We make sure the company’s annual dividend payout has been growing 8% or faster over the past 5 years, i.e., we get a list of payouts from the relevant Yahoo Finance page then put the most recent year’s payout and the payout for 5 years ago into a Compound Annual Growth Rate calculator.
In the “repeat” cycle, we take the same steps 3 months later, then select stocks to add or delete by using a brokerage that charges you a flat fee of ~1% of Net Asset Value/yr. This allows you to trade without incurring transaction costs (including dividend reinvestment).
If you’re a glutton for punishment, you can extend your oversight beyond S&P 100 stocks to include those on the Barron’s 500 List, published each year in May, which has the advantage of ranking companies by using 3 cash flow metrics. Then you’ll be running the Extended Version of The 2 and 8 Club, which currently has 32 companies (see Table for Week 329). This week’s blog drills down on the 10 companies in the Extended Version that ultimately depend on feedstocks provided by farmers, to ultimately market foods & beverages, motor engine fuels, animal feed, cigarettes, cotton shirts, and plastics made from corn.
Mission: Set up a Standard Spreadsheet of those 10 companies.
Execution: see Table.
Administration: Farmers operate a capital-intensive business that requires large-scale production on ~1000 acres to justify the cost of chemicals and fertilizer plus the main cost, which is for the purchase and maintenance of equipment (e.g. combines, tractors, grain carts, center-pivot irrigation systems, sprayers, semi-tractors that haul 30 tons of grain, grain-drying bins, grain storage bins, and satellite navigation links needed for weather forecasting and precision agriculture). Their mobile powered equipment requires diesel fuel, and their grain-drying bins require natural gas or propane.
Archer-Daniels-Midland is the only pure Ag company on the list. ADM collects crops at railheads for further shipment and initial processing, and distributes products worldwide. Much of that distribution begins by loading grain onto barges in the Mississippi River.
Weather is the key variable. The software and hardware on weather satellites is IBM gear, and IBM owns The Weather Channel. GPS-based software is an important part of precision agriculture, and similarly depends on satellites running IBM equipment. Cummins (CMI) and Caterpillar (CAT) provide diesel engines, and ExxonMobil (XOM) is one of the largest sources of diesel fuel. CAT also makes skid-loaders and backhoe/end-loaders that some farmers use.
PepsiCo (PEP) and Coca-Cola (KO) process a variety of farm products (including milk, cheese, oranges, oats, coffee and tea) into dozens of branded foods and beverages that are found worldwide. Altria Group (MO) processes tobacco plants into cigarettes and smokeless tobacco for the US market. VF Corporation (VFC) is the largest company that fabricates clothing for a variety of markets, and depends on farmers to produce its main feedstock (cotton). Target (TGT) markets clothing, and Super Target stores offer a large variety of foods and beverages.
Bottom Line: Farm incomes have fallen 20%/yr over the last 3 years, but appear to have stabilized with this year’s harvest. Cost-cutting and scaling-up are the main survival strategies. Farms that are large enough to sustain a family are multi-million dollar enterprises that cultivate more than a square mile of ground. When farmers are forced to cut costs, suppliers are forced into being acquired by (or merged with) other companies. To further complicate matters, efficient transportation networks now circle the planet. The supply of crop commodities outstrips demand enough that the effects of drought or war in one place are mitigated by bumper crops in another place.
Risk Rating: 8 (where 10-yr Treasury Notes = 1, S&P 500 Index = 5, gold bullion = 10).
Full Disclosure: I dollar-cost average into KO, XOM, and IBM, and also own shares of CAT and MO.
"The 2 and 8 Club" (CR) 2017 Invest Tune Retire.com
Post questions and comments in the box below or send email to: irv.mcquarrie@InvestTuneRetire.com
Sunday, August 20
Week 320 - Key Players In The Food Chain That Have Tangible Book Value
Situation: As a stock-picker, you need to invest some of your assets in mature industries. Those are the industries where sales growth is a function of population growth. Companies in those industries typically retain value during recessions. Food & beverage companies are the prime example.
Mission: Set up a spreadsheet of key players in the food chain. Exclude any that do not have positive net Tangible Book Value. Why? Because the SEC requires that before a company can issue stock for sale on a public exchange. Include S&P stock and bond ratings, as well as key Balance Sheet debt ratios. Determine whether Free Cash Flow (FCF) covered company dividend payments for the last two quarters. Determine whether the company is an efficient deployer of capital by comparing Weighted Average Cost of Capital (WACC) to Return on Invested Capital (ROIC). The latter number should be at least twice the former.
Execution: see Table.
Administration: You’re a stock-picker because you think you have a strategy for beating a broad market index fund (e.g. SPY). You’re unlikely to succeed unless you avoid paying Capital Gains taxes until after you drop into a lower tax bracket (i.e., retire). Try to stick with companies that issue A-rated bonds and stocks, and practice other risk-reducing measures (e.g. deploy capital efficiently, have a clean Balance Sheet, and build a strong brand).
You’re also unlikely to succeed if you invest in a volatile stock, i.e., one where the price varies more widely than the price of the S&P 500 Index. We identify that 3 ways:
1) Stock price change vs. change in the S&P 500 Index is greater in response to withdrawal of a key market support, e.g. the cost of taking out a loan or buying a house goes up 20%, or spot prices for key commodities go down 20% (see Column D in any of our Tables);
2) 5-Yr Beta exceeds 1 (see Column I in any of our Tables);
3) 16-Yr stock price volatility is statistically greater than S&P 500 Index volatility per the BMW Method, which we highlight in red (see Column M of any of our Tables).
Bottom Line: We have uncovered only 2 “buy-and-hold” stocks: Costco Wholesale (COST) and Coca-Cola (KO). Consider investing in a sector fund, e.g. SPDR Consumer Staples Select Sector ETF (XLP).
Risk Rating: 7 (where 10-Yr Treasury Notes = 1, S&P 500 Index = 5, and gold = 10)
Full Disclosure: I dollar-average into KO and MON, and also own shares of HRL, COST, AGU, and WMT.
Post questions and comments in the box below or send email to: irv.mcquarrie@InvestTuneRetire.com
Mission: Set up a spreadsheet of key players in the food chain. Exclude any that do not have positive net Tangible Book Value. Why? Because the SEC requires that before a company can issue stock for sale on a public exchange. Include S&P stock and bond ratings, as well as key Balance Sheet debt ratios. Determine whether Free Cash Flow (FCF) covered company dividend payments for the last two quarters. Determine whether the company is an efficient deployer of capital by comparing Weighted Average Cost of Capital (WACC) to Return on Invested Capital (ROIC). The latter number should be at least twice the former.
Execution: see Table.
Administration: You’re a stock-picker because you think you have a strategy for beating a broad market index fund (e.g. SPY). You’re unlikely to succeed unless you avoid paying Capital Gains taxes until after you drop into a lower tax bracket (i.e., retire). Try to stick with companies that issue A-rated bonds and stocks, and practice other risk-reducing measures (e.g. deploy capital efficiently, have a clean Balance Sheet, and build a strong brand).
You’re also unlikely to succeed if you invest in a volatile stock, i.e., one where the price varies more widely than the price of the S&P 500 Index. We identify that 3 ways:
1) Stock price change vs. change in the S&P 500 Index is greater in response to withdrawal of a key market support, e.g. the cost of taking out a loan or buying a house goes up 20%, or spot prices for key commodities go down 20% (see Column D in any of our Tables);
2) 5-Yr Beta exceeds 1 (see Column I in any of our Tables);
3) 16-Yr stock price volatility is statistically greater than S&P 500 Index volatility per the BMW Method, which we highlight in red (see Column M of any of our Tables).
Bottom Line: We have uncovered only 2 “buy-and-hold” stocks: Costco Wholesale (COST) and Coca-Cola (KO). Consider investing in a sector fund, e.g. SPDR Consumer Staples Select Sector ETF (XLP).
Risk Rating: 7 (where 10-Yr Treasury Notes = 1, S&P 500 Index = 5, and gold = 10)
Full Disclosure: I dollar-average into KO and MON, and also own shares of HRL, COST, AGU, and WMT.
Post questions and comments in the box below or send email to: irv.mcquarrie@InvestTuneRetire.com
Sunday, June 25
Week 312 - Farm Equipment
Situation: Food production is experiencing a “glitch.” Too many people know how to do it too well. Food commodities are being supplied in excess of demand, tapping out storage facilities. Farmers are doing well to “break even” after expenses, i.e., Cost of Goods Sold (CGS) is barely covered by prices paid at the grain elevator. There may not be enough money left to make “precision farming” upgrades to farm equipment. Relations between farmers and their bankers have become strained, since bankers typically refuse to make long-term loans for anything other than farmland. That leaves farm equipment dealers having to make the long-term loan or forego the sale.
Mission: Outline the equipment requirements for farming and create a spreadsheet of public companies that supply such equipment.
Execution: see Table.
Administration: Farming is now in the digital age, where GPS satellites collect information on vegetation and soil that the farmer can buy to better regulate irrigation and the application of fertilizer. His agronomist will use the data to make more cost-effective decisions on the use of pesticides, herbicides, and fungicides. “Precision farming” can sometimes double crop yields compared to the pre-satellite era. But the result of using these devices on his tractor, wi-fi downloads to his agronomist, and upgrades to the accompanying software has not only been expensive but the added efficiencies have to cut crop prices in half. The “family farm” is rapidly disappearing from the planet.
Bottom Line: Commodities will always be risky investments, even the most essential (food and fuel). When there is something people can’t “live” without, the business world will allocate capital toward its production. That effort continues until overproduction converts multi-year profits to multi-year losses. Subsistence farming is giving way to corporate farming because of the abundance of capital being allocated to crop production. Shortages of skilled labor limit the buildout of “precision farming”, giving rise to further technological breakthroughs. These are expensive, and contributed to the 10.5% decline in US farm incomes last year, extending a trend that started in 2014.
The increases in farm productivity are likely to keep crop prices low until the less-efficient farms (both family and corporate) go out of business. We’re in a period when farmers are less able to afford new equipment and need to make greater use of services to upgrade existing equipment, where Deere (DE) is the dominant company. An increased emphasis will also be placed on non-food uses for corn (268 processing plants in US and Canada) and oilseeds (64 processing plants in US and Canada), where Archer Daniels Midland (ADM) is the dominant company with 265 food & non-food processing plants worldwide. Ethanol, biodiesel, and soy oil plants dot the landscape of farming regions and are a convenient point of sale for farmers, which also link to rail and barge networks that transport crops to food processing plants worldwide. Investors also need to consider owning stock in one of the smaller companies: e.g. Raven Industries (RAVN is the leading supplier and servicer for precision agriculture products) and Valmont Industries (VMI is the leading supplier and servicer for center-pivot irrigation systems).
Risk Rating: 7-8 (where 10-Yr US Treasuries = 1, S&P 500 Index = 5, and gold = 10).
Full Disclosure: I dollar-average into XOM and also own stock in CMI, preferring to wait and see whether a new commodity supercycle will be starting soon.
Note: We use discounted cash flow from dividends and sale of the stock (after a 10-Yr holding period) to estimate Net Present Value; see Columns V-Z in the Table. The exponential growth rate in stock price over the next 10 years is estimated to be an extrapolation of the growth in stock price over the past 16 years. The Discount Rate is set at 9%, meaning that a stock with a positive NPV would return more over 10 years than a 10-Yr US Treasury Note paying 9%/Yr. Dividend Growth over the next 10 years is extrapolated from Dividend Growth over the past 4 years. Be aware that our NPV calculation is for comparative purposes only. Any rise in the rate of interest paid by 10-Yr Treasury Notes would diminish stock NPVs, provided that those Notes continue to carry a AAA credit rating from S&P.
Red highlights in the Table denote underperformance relative to our benchmark: Vanguard Balanced Index Fund (VBINX) at Line 22. Purple highlights denote metrics of concern.
Post questions and comments in the box below or send email to: irv.mcquarrie@InvestTuneRetire.com
Mission: Outline the equipment requirements for farming and create a spreadsheet of public companies that supply such equipment.
Execution: see Table.
Administration: Farming is now in the digital age, where GPS satellites collect information on vegetation and soil that the farmer can buy to better regulate irrigation and the application of fertilizer. His agronomist will use the data to make more cost-effective decisions on the use of pesticides, herbicides, and fungicides. “Precision farming” can sometimes double crop yields compared to the pre-satellite era. But the result of using these devices on his tractor, wi-fi downloads to his agronomist, and upgrades to the accompanying software has not only been expensive but the added efficiencies have to cut crop prices in half. The “family farm” is rapidly disappearing from the planet.
Bottom Line: Commodities will always be risky investments, even the most essential (food and fuel). When there is something people can’t “live” without, the business world will allocate capital toward its production. That effort continues until overproduction converts multi-year profits to multi-year losses. Subsistence farming is giving way to corporate farming because of the abundance of capital being allocated to crop production. Shortages of skilled labor limit the buildout of “precision farming”, giving rise to further technological breakthroughs. These are expensive, and contributed to the 10.5% decline in US farm incomes last year, extending a trend that started in 2014.
The increases in farm productivity are likely to keep crop prices low until the less-efficient farms (both family and corporate) go out of business. We’re in a period when farmers are less able to afford new equipment and need to make greater use of services to upgrade existing equipment, where Deere (DE) is the dominant company. An increased emphasis will also be placed on non-food uses for corn (268 processing plants in US and Canada) and oilseeds (64 processing plants in US and Canada), where Archer Daniels Midland (ADM) is the dominant company with 265 food & non-food processing plants worldwide. Ethanol, biodiesel, and soy oil plants dot the landscape of farming regions and are a convenient point of sale for farmers, which also link to rail and barge networks that transport crops to food processing plants worldwide. Investors also need to consider owning stock in one of the smaller companies: e.g. Raven Industries (RAVN is the leading supplier and servicer for precision agriculture products) and Valmont Industries (VMI is the leading supplier and servicer for center-pivot irrigation systems).
Risk Rating: 7-8 (where 10-Yr US Treasuries = 1, S&P 500 Index = 5, and gold = 10).
Full Disclosure: I dollar-average into XOM and also own stock in CMI, preferring to wait and see whether a new commodity supercycle will be starting soon.
Note: We use discounted cash flow from dividends and sale of the stock (after a 10-Yr holding period) to estimate Net Present Value; see Columns V-Z in the Table. The exponential growth rate in stock price over the next 10 years is estimated to be an extrapolation of the growth in stock price over the past 16 years. The Discount Rate is set at 9%, meaning that a stock with a positive NPV would return more over 10 years than a 10-Yr US Treasury Note paying 9%/Yr. Dividend Growth over the next 10 years is extrapolated from Dividend Growth over the past 4 years. Be aware that our NPV calculation is for comparative purposes only. Any rise in the rate of interest paid by 10-Yr Treasury Notes would diminish stock NPVs, provided that those Notes continue to carry a AAA credit rating from S&P.
Red highlights in the Table denote underperformance relative to our benchmark: Vanguard Balanced Index Fund (VBINX) at Line 22. Purple highlights denote metrics of concern.
Post questions and comments in the box below or send email to: irv.mcquarrie@InvestTuneRetire.com
Sunday, June 4
Week 309 - Barron’s 500 Food Processing Companies
Situation: The food processing sector can be quite rewarding for stock-pickers, relative to risk, even though profit margins are thin. This “competitive advantage” occurs because food is an “essential good.” Consumers tend to purchase the same food items in the same quantities, month after month, regardless of price. Demand is relatively insensitive to price, so prices are said to be inelastic. This is fortunate for the food processor because input costs can change on short notice (typically due to weather events or transportation bottlenecks).
Mission: Identify and analyze all of the large and well-established US food processing companies that are publicly traded.
Execution: Provide a spreadsheet analysis (see Table) of those companies large enough to be on the Barron’s 500 List (http://online.wsj.com/public/resources/documents/500TopCompanies2016.pdf) and well-established enough to have had 16 years of trading records analyzed by the BMW Method. Exclude companies that issue “junk bonds” (those rated lower than BBB- by S&P).
Bottom Line: We’ve come up with 18 companies (see Table). In the aggregate, their stocks make a very good investment, having returned over 11%/yr since the S&P 500 peak on 9/1/2000 vs. less than 5%/yr for VFINX (the lowest-cost S&P 500 Index fund at Line 28 in the Table). Risk measures also look good. For example, the average stock gained 3.7%/yr during the 4.5 year Housing Crisis vs. a loss of 3%/yr for VFINX (see Column D in the Table), and has less than half the price volatility (as measured by the 5-Yr Beta statistic, see Column I in the Table).
What’s not to like? Well, a lot. Try picking just 3 of the 18 for your portfolio. Maybe you want to confine your research to A-rated stocks (see Columns U and V)? Only 6 qualify: HRL, COST, HSY, KO, PEP and WMT. Maybe you want stocks with a clean Balance Sheet (see Columns R through T in the Table)? Only 8 qualify: HRL, COST, WFM, INGR, KO, WMT, ADM and KR. Maybe you don’t want to gamble, so you’ll avoid the red-highlighted stocks in Column M of the Table. There are 9 of those: SJM, COST, GIS, KO, K, PEP, WMT, CPB and SYY. You get the point. Very few are “safe,” meaning that the stock is able to clear all 3 of those hurdles. There are 3 of those: Costco Wholesale (COST), Coca-Cola (KO) and Wal-Mart Stores (WMT). Not surprisingly, both are strong global brands, as shown in Columns P and Q. Only COST and KO have a projected rate of return over the next decade of at least 9%/yr, i.e., a positive NPV number in Column AA of the Table.
Risk Rating: 6 (where 10-Yr Treasury Note = 1, S&P 500 Index = 5, gold bullion = 10)
Full Disclosure: I dollar-average into KO, and also own shares of HRL, WMT, and COST.
NOTE: Metrics are current for the Sunday of publication. Red highlights denote under-performance vs. VBINX at Line 27 in the Table. Purple highlights denote Balance Sheet issues and shortfalls. Net Present Value (NPV) inputs are described and justified in the Appendix to Week 256: Briefly, Discount Rate = 9%, Holding Period = 10 years, Initial Cost = average stock price over the past 50 days (corrected for transaction costs of 2.5% when buying ~$5000 worth of shares). Dividend Growth Rate is the 3-Yr CAGR found at Column H. Price Growth Rate is the 16-Yr CAGR found at Column K (http://invest.kleinnet.com/bmw1/). Price Return (from selling all shares in the 10th year) is corrected for transaction costs of 2.5%. The Discount Rate of 9% approximates Total Returns/yr from a stock index of similar risk to owning shares in a small number of large-cap stocks, where risk due to “selection bias” is paramount. That stock index is the S&P MidCap 400 Index at Line 32 in the Table. The ETF for that index is MDY at Line 26. For bonds, Discount Rate = Interest Rate.
Post questions and comments in the box below or send email to: irv.mcquarrie@InvestTuneRetire.com
Mission: Identify and analyze all of the large and well-established US food processing companies that are publicly traded.
Execution: Provide a spreadsheet analysis (see Table) of those companies large enough to be on the Barron’s 500 List (http://online.wsj.com/public/resources/documents/500TopCompanies2016.pdf) and well-established enough to have had 16 years of trading records analyzed by the BMW Method. Exclude companies that issue “junk bonds” (those rated lower than BBB- by S&P).
Bottom Line: We’ve come up with 18 companies (see Table). In the aggregate, their stocks make a very good investment, having returned over 11%/yr since the S&P 500 peak on 9/1/2000 vs. less than 5%/yr for VFINX (the lowest-cost S&P 500 Index fund at Line 28 in the Table). Risk measures also look good. For example, the average stock gained 3.7%/yr during the 4.5 year Housing Crisis vs. a loss of 3%/yr for VFINX (see Column D in the Table), and has less than half the price volatility (as measured by the 5-Yr Beta statistic, see Column I in the Table).
What’s not to like? Well, a lot. Try picking just 3 of the 18 for your portfolio. Maybe you want to confine your research to A-rated stocks (see Columns U and V)? Only 6 qualify: HRL, COST, HSY, KO, PEP and WMT. Maybe you want stocks with a clean Balance Sheet (see Columns R through T in the Table)? Only 8 qualify: HRL, COST, WFM, INGR, KO, WMT, ADM and KR. Maybe you don’t want to gamble, so you’ll avoid the red-highlighted stocks in Column M of the Table. There are 9 of those: SJM, COST, GIS, KO, K, PEP, WMT, CPB and SYY. You get the point. Very few are “safe,” meaning that the stock is able to clear all 3 of those hurdles. There are 3 of those: Costco Wholesale (COST), Coca-Cola (KO) and Wal-Mart Stores (WMT). Not surprisingly, both are strong global brands, as shown in Columns P and Q. Only COST and KO have a projected rate of return over the next decade of at least 9%/yr, i.e., a positive NPV number in Column AA of the Table.
Risk Rating: 6 (where 10-Yr Treasury Note = 1, S&P 500 Index = 5, gold bullion = 10)
Full Disclosure: I dollar-average into KO, and also own shares of HRL, WMT, and COST.
NOTE: Metrics are current for the Sunday of publication. Red highlights denote under-performance vs. VBINX at Line 27 in the Table. Purple highlights denote Balance Sheet issues and shortfalls. Net Present Value (NPV) inputs are described and justified in the Appendix to Week 256: Briefly, Discount Rate = 9%, Holding Period = 10 years, Initial Cost = average stock price over the past 50 days (corrected for transaction costs of 2.5% when buying ~$5000 worth of shares). Dividend Growth Rate is the 3-Yr CAGR found at Column H. Price Growth Rate is the 16-Yr CAGR found at Column K (http://invest.kleinnet.com/bmw1/). Price Return (from selling all shares in the 10th year) is corrected for transaction costs of 2.5%. The Discount Rate of 9% approximates Total Returns/yr from a stock index of similar risk to owning shares in a small number of large-cap stocks, where risk due to “selection bias” is paramount. That stock index is the S&P MidCap 400 Index at Line 32 in the Table. The ETF for that index is MDY at Line 26. For bonds, Discount Rate = Interest Rate.
Post questions and comments in the box below or send email to: irv.mcquarrie@InvestTuneRetire.com
Sunday, May 28
Week 308 - Barron’s 500: Agricultural Production Companies
Situation: Food commodities are coming back in favor as investments, as protein sources are becoming more affordable. Demand for meat, milk, soybeans, and cereal grains is robust. Companies that help farmers and ranchers produce those protein-rich commodities stand to benefit.
Mission: Apply our standard spreadsheet to all of the companies on the 2016 Barron’s 500 List that support agricultural production, and have a 16-Yr trading record that has been analyzed statistically by the BMW Method.
Execution: see Table.
Administration: You’ll want to know how to invest in the companies that emerge from the ongoing need to consolidate operations: Potash is buying Agrium, Bayer is buying Monsanto, and duPont’s CEO will run the agricultural assets of duPont and Dow Chemical once that merger is completed. So, 5 of the 9 companies listed in the Table are “in play”; you can learn a great deal about what each company offers its merger partner by studying the Table.
Bottom Line: Companies that supply farmers with their tools for production are slowly emerging from a financial wasteland (caused by the overproduction of agricultural commodities). Their finances have improved only because of consolidating operations and dialing back production, which has been brought about through mergers: Dow Chemical with du Pont, Agrium with Potash, Syngenta with China National Chemical, Monsanto with Bayer. Only time will tell whether lean production will translate into enough demand to sustain these new companies. China will be the key source of demand, whether we’re talking about food commodities or solar panels.
Risk Rating: 8 (where 10-Yr Treasuries = 1, S&P 500 Index = 5, and gold bullion = 10)
Full Disclosure: I dollar-average into Monsanto (MON) and also own shares of Agrium (AGU).
NOTE: Metrics are current for the Sunday of publication. Red highlights denote under-performance vs. VBINX at Line 17 in the Table. Purple highlights denote Balance Sheet issues and shortfalls. Net Present Value (NPV) inputs are described and justified in the Appendix to Week 256: Briefly, Discount Rate = 9%, Holding Period = 10 years, Initial Cost = average stock price over the past 50 days (corrected for transaction costs of 2.5% when buying ~$5000 worth of shares). Dividend Growth Rate is the 4-Yr CAGR found at Column H. Price Growth Rate is the 16-Yr CAGR found at Column K (http://invest.kleinnet.com/bmw1/). Price Return (from selling all shares in the 10th year) is corrected for transaction costs of 2.5%. The Discount Rate of 9% approximates Total Returns/yr from a stock index of similar risk to owning shares in a small number of large-cap stocks, where risk due to “selection bias” is paramount. That stock index is the S&P MidCap 400 Index at Line 32 in the Table. The ETF for that index is MDY at Line 16. For bonds, Discount Rate = Interest Rate.
Post questions and comments in the box below or send email to: irv.mcquarrie@InvestTuneRetire.com
Mission: Apply our standard spreadsheet to all of the companies on the 2016 Barron’s 500 List that support agricultural production, and have a 16-Yr trading record that has been analyzed statistically by the BMW Method.
Execution: see Table.
Administration: You’ll want to know how to invest in the companies that emerge from the ongoing need to consolidate operations: Potash is buying Agrium, Bayer is buying Monsanto, and duPont’s CEO will run the agricultural assets of duPont and Dow Chemical once that merger is completed. So, 5 of the 9 companies listed in the Table are “in play”; you can learn a great deal about what each company offers its merger partner by studying the Table.
Bottom Line: Companies that supply farmers with their tools for production are slowly emerging from a financial wasteland (caused by the overproduction of agricultural commodities). Their finances have improved only because of consolidating operations and dialing back production, which has been brought about through mergers: Dow Chemical with du Pont, Agrium with Potash, Syngenta with China National Chemical, Monsanto with Bayer. Only time will tell whether lean production will translate into enough demand to sustain these new companies. China will be the key source of demand, whether we’re talking about food commodities or solar panels.
Risk Rating: 8 (where 10-Yr Treasuries = 1, S&P 500 Index = 5, and gold bullion = 10)
Full Disclosure: I dollar-average into Monsanto (MON) and also own shares of Agrium (AGU).
NOTE: Metrics are current for the Sunday of publication. Red highlights denote under-performance vs. VBINX at Line 17 in the Table. Purple highlights denote Balance Sheet issues and shortfalls. Net Present Value (NPV) inputs are described and justified in the Appendix to Week 256: Briefly, Discount Rate = 9%, Holding Period = 10 years, Initial Cost = average stock price over the past 50 days (corrected for transaction costs of 2.5% when buying ~$5000 worth of shares). Dividend Growth Rate is the 4-Yr CAGR found at Column H. Price Growth Rate is the 16-Yr CAGR found at Column K (http://invest.kleinnet.com/bmw1/). Price Return (from selling all shares in the 10th year) is corrected for transaction costs of 2.5%. The Discount Rate of 9% approximates Total Returns/yr from a stock index of similar risk to owning shares in a small number of large-cap stocks, where risk due to “selection bias” is paramount. That stock index is the S&P MidCap 400 Index at Line 32 in the Table. The ETF for that index is MDY at Line 16. For bonds, Discount Rate = Interest Rate.
Post questions and comments in the box below or send email to: irv.mcquarrie@InvestTuneRetire.com
Sunday, April 30
Week 304 - Bread and Milk
Situation: The top 3 grocery basket items are sugary soft drinks, milk, and bread (see Week 297). By USDA category, “sweetened beverages” represent 7.5% of grocery store sales, “milk” represents 3.7%, and “bread and crackers” represent 6.1%. Bread and milk are basic foodstuffs because of their nutritional value, meaning they are rich in energy (starches and sugars) and body-building proteins. Bread is made from high-gluten flour that comes from hard red or hard white wheat. Milk is perishable and has to be sourced from regional dairy herds. It has high protein content (both caseins and whey proteins). Milk proteins and gliadin (the gluten protein found in hard red and white wheat) contain all 9 of the “essential” amino acids that cannot be synthesized in the human body.
Mission: Find out which well-established companies in the Food & Beverage sub-industry process either dairy products or high-gluten flour to put milk or bread on your grocery store’s shelves. Focus on the companies that have over a billion dollars of stock market capital and own their own bakery or milk processing plant.
Execution: There are 9 companies that meet our criteria (Table).
Administration: Three of those 9 companies derive the majority of their sales from groceries. Namely, Wal-Mart Stores (WMT), Costco Wholesale (COST) and Kroger (KR). Kroger has 17 milk processing plants and 9 bakeries. Wal-Mart’s first food production plant in the US will be a milk processing plant in Fort Wayne, Indiana, scheduled to open this fall. Otherwise, Wal-Mart sources milk from regional dairies. Many of Costco’s warehouse stores have a bakery nearby. Wal-Mart sources its bread from Grupo Bimbo USA. Grupo Bimbo is a Mexican company that sells more bread than any other company in the world.
The only bakery that delivers bread throughout the US is Flowers Foods (FLO). The only milk processor that has nationwide processing plants is Dean Foods (DF).
Both Bunge (BG) and Archer Daniels Midland (ADM) process wheat into high-gluten flour for wholesale delivery nationwide. General Mills (GIS) sells the leading brand of flour on grocery store shelves (Gold Label), particularly the high-gluten flour that is required for making bread.
Coca-Cola (KO) co-produces a high-nutrition “ultra-filtered” milk called “Fairlife” for distribution nationwide. Fairlife costs approximately twice as much per ounce as standard milk. In return, you get twice as much protein and half as much sugar per ounce.
Bottom Line: Basic foodstuffs like bread and milk are typically produced locally, by limited liability companies (LLCs). Production processes are standardized and widespread, so local producers have the advantages of low shipping costs and guaranteed freshness. To compete, a for-profit national corporation would have to introduce special features in its milk or bread products, and achieve economies of scale. That would mean owning several large processing plants and a dedicated fleet of trucks. In return for marketing a product with razor-thin profit margins, the company is distributing an “essential good”, which means that price changes would have a minimal impact on per-unit sales. Such products are said to be inelastic. Kroger (KR) is the only company that produces both milk and bread for nationwide distribution.
We have calculated the Net Present Value (NPV) of owning a stock for the next 10 yrs then selling it (see Column Y in the Table). NPV aggregates the income streams from the current dividend (Column G), continuation of the dividend growth rate that has been established over the past 3 yrs (Column H), and continuation of the price growth rate that has been established over the past 20 yrs (Column K). A positive number suggests a total return of 9%/yr or more. Per NPV, your leading choices are Flowers Foods (FLO) and Costco Wholesale (COST).
Risk Rating: 6 (where 10-Yr Treasuries = 1, S&P 500 Index = 5, gold bullion = 10)
Full Disclosure: I dollar-average into KO, and also own shares of COST and WMT.
NOTE: Metrics are current for the Sunday of publication. Red highlights denote under-performance vs. VBINX at Line 17 in the Table. Purple highlights denote Balance Sheet issues and shortfalls. Net Present Value (NPV) inputs are described and justified in the Appendix to Week 256: Briefly, Discount Rate = 9%, Holding Period = 10 years, Initial Cost = average stock price over the past 50 days (corrected for transaction costs of 2.5% when buying ~$5000 worth of shares). Dividend Growth Rate is the 3-Yr CAGR found at Column H. Price Growth Rate is the 16-Yr CAGR found at Column K (http://invest.kleinnet.com/bmw1/). Price Return (from selling all shares in the 10th year) is corrected for transaction costs of 2.5%. The Discount Rate of 9% approximates Total Returns/yr from a stock index of similar risk to owning shares in a small number of large-cap stocks, where risk due to “selection bias” is paramount. That stock index is the S&P MidCap 400 Index at Line 29 in the Table. The ETF for that index is MDY at Line 16. For bonds, Discount Rate = Interest Rate.
Post questions and comments in the box below or send email to: irv.mcquarrie@InvestTuneRetire.com
Mission: Find out which well-established companies in the Food & Beverage sub-industry process either dairy products or high-gluten flour to put milk or bread on your grocery store’s shelves. Focus on the companies that have over a billion dollars of stock market capital and own their own bakery or milk processing plant.
Execution: There are 9 companies that meet our criteria (Table).
Administration: Three of those 9 companies derive the majority of their sales from groceries. Namely, Wal-Mart Stores (WMT), Costco Wholesale (COST) and Kroger (KR). Kroger has 17 milk processing plants and 9 bakeries. Wal-Mart’s first food production plant in the US will be a milk processing plant in Fort Wayne, Indiana, scheduled to open this fall. Otherwise, Wal-Mart sources milk from regional dairies. Many of Costco’s warehouse stores have a bakery nearby. Wal-Mart sources its bread from Grupo Bimbo USA. Grupo Bimbo is a Mexican company that sells more bread than any other company in the world.
The only bakery that delivers bread throughout the US is Flowers Foods (FLO). The only milk processor that has nationwide processing plants is Dean Foods (DF).
Both Bunge (BG) and Archer Daniels Midland (ADM) process wheat into high-gluten flour for wholesale delivery nationwide. General Mills (GIS) sells the leading brand of flour on grocery store shelves (Gold Label), particularly the high-gluten flour that is required for making bread.
Coca-Cola (KO) co-produces a high-nutrition “ultra-filtered” milk called “Fairlife” for distribution nationwide. Fairlife costs approximately twice as much per ounce as standard milk. In return, you get twice as much protein and half as much sugar per ounce.
Bottom Line: Basic foodstuffs like bread and milk are typically produced locally, by limited liability companies (LLCs). Production processes are standardized and widespread, so local producers have the advantages of low shipping costs and guaranteed freshness. To compete, a for-profit national corporation would have to introduce special features in its milk or bread products, and achieve economies of scale. That would mean owning several large processing plants and a dedicated fleet of trucks. In return for marketing a product with razor-thin profit margins, the company is distributing an “essential good”, which means that price changes would have a minimal impact on per-unit sales. Such products are said to be inelastic. Kroger (KR) is the only company that produces both milk and bread for nationwide distribution.
We have calculated the Net Present Value (NPV) of owning a stock for the next 10 yrs then selling it (see Column Y in the Table). NPV aggregates the income streams from the current dividend (Column G), continuation of the dividend growth rate that has been established over the past 3 yrs (Column H), and continuation of the price growth rate that has been established over the past 20 yrs (Column K). A positive number suggests a total return of 9%/yr or more. Per NPV, your leading choices are Flowers Foods (FLO) and Costco Wholesale (COST).
Risk Rating: 6 (where 10-Yr Treasuries = 1, S&P 500 Index = 5, gold bullion = 10)
Full Disclosure: I dollar-average into KO, and also own shares of COST and WMT.
NOTE: Metrics are current for the Sunday of publication. Red highlights denote under-performance vs. VBINX at Line 17 in the Table. Purple highlights denote Balance Sheet issues and shortfalls. Net Present Value (NPV) inputs are described and justified in the Appendix to Week 256: Briefly, Discount Rate = 9%, Holding Period = 10 years, Initial Cost = average stock price over the past 50 days (corrected for transaction costs of 2.5% when buying ~$5000 worth of shares). Dividend Growth Rate is the 3-Yr CAGR found at Column H. Price Growth Rate is the 16-Yr CAGR found at Column K (http://invest.kleinnet.com/bmw1/). Price Return (from selling all shares in the 10th year) is corrected for transaction costs of 2.5%. The Discount Rate of 9% approximates Total Returns/yr from a stock index of similar risk to owning shares in a small number of large-cap stocks, where risk due to “selection bias” is paramount. That stock index is the S&P MidCap 400 Index at Line 29 in the Table. The ETF for that index is MDY at Line 16. For bonds, Discount Rate = Interest Rate.
Post questions and comments in the box below or send email to: irv.mcquarrie@InvestTuneRetire.com
Sunday, March 12
Week 297 - Sugary Soft Drinks And Milk Lead The Food & Beverage Sector In Sales
Situation: Milk is still the leading category of food expenditures for the 80% of households that pay with cash or credit/debit cards, but the 20% of households that pay with Food Stamps bring sugary soft drink sales up to first place nationwide. Milk is perhaps the single most nutritious food (see Week 254), whereas, refined sugar is the only “food” found in sugary soft drinks. Those drinks are being held responsible for the strong link between poverty and obesity, as well as the strong link between obesity and Type II diabetes.
So, let’s revisit the large and well-established Food & Beverage companies to see which are doing well from an investor’s standpoint. We need to know how much refined sugar contributes to their prosperity, as opposed to milk, those being the top revenue producers. Has publicity about the detrimental effects of refined sugar been effective? In other words, are sugary soft drink sales still rising and milk sales still falling?
Mission: Apply our standard spreadsheet analysis to Food & Beverage companies on the 2016 Barron’s 500 List that have had their stock traded long enough to appear on the 16-Yr BMW Method list.
Execution: see Table.
Administration: We find that 19 companies meet the requirements for size and longevity. But only 8 are Dividend Achievers (see Column AD in the Table), and only 4 of the 16 dividend payers have clean Balance Sheets, HRL, INGR, KO and ADM (see Columns P-R). This tells me that the largest and best-established food companies are struggling. Their managers must be having a hard time figuring out how to grow sales faster than the rate of population growth. A favorite tactic is to have a large advertising budget to promote products that the consumer is expected to like (based on marketing studies). That strategy has pushed Coca-Cola and PepsiCo to the top of the pack, with market capitalizations more than 4 times higher than the next largest food processor: General Mills (GIS; see Column AA in the Table).
Bottom Line: Food & Beverage stocks are thought to be “defensive” because of being in the S&P Consumer Staples industry. However, they’re commodity-related (high risk/high reward) because of being tied to global weather cycles. In my opinion, only 2 of the 19 companies in the Table are sufficiently safe and effective for your retirement portfolio (HRL and KO). Procter & Gamble (PG) is perhaps a better way to invest in Consumer Staples (see Line 23 in the Table).
Coca-Cola (KO) and/or PepsiCo (PEP) dominate sales for sugary soft drinks in every country, even though the sales of such drinks have fallen for 11 yrs in a row, and great efforts have been made to find healthy alternatives. Coca-Cola still derives 70% of its revenue from sugary soft drinks, even though it has diversified into milk (Fairlife), fruit juice (Minute Maid, Simply Orange), sugary vegetable drinks (Suja Juice, Fuze, Odwalla), energy drinks (Monster), and Coca-Cola Life that uses the natural sweetener Stevia. The good news is that the detrimental effects of sugary soft drinks have become well known and consumers expect companies do something about it. Both PepsiCo and Coca-Cola appear to be making every effort to comply, while continuing to rely on the aggressive marketing of sugary soft drinks. In summary, the trendline for sugary soft drink sales is tilting downward while milk continues to fall without pausing.
With regard to milk sales here in the US, the main processor, Dean Foods (DF), almost faced bankruptcy because sales have fallen 30% since 1975. Dean Foods survived by splitting off its most successful subsidiary, WhiteWave Foods, the producer of Horizon Organic milk and Silk soy milk. “The move was designed to get investors to pay more for shares in a business unit with higher profit margins and faster growth prospects than conventional milk.”
Kroger (KR) operates 16 dairies that distribute milk to 34 states, and Coca-Cola (KO) has assembled a large group of dairy co-operatives to produce “ultra-filtered milk.” That new technology separates milk ingredients then recombines those selectively to produce a more nutritious product called "Fairlife," which has half the sugar and twice the protein. Fairlife Milk is distributed to grocery stores nationwide by the Minute Maid division, and is currently priced at an 11% premium to Parmalat Milk in Wal-Mart Stores. Fairlife Milk has been available for less than two years; people who shop with food stamps presumably don’t yet know its benefits and would perhaps shy away from paying the 11% premium price even if they knew.
Risk Rating: 6 (where 10-Yr Treasury Notes = 1, S&P 500 Index = 5, gold bullion = 10)
Full Disclosure: I dollar-cost average into KO, and also own shares of HRL and PG.
NOTE: Metrics are current for the Sunday of publication. Red highlights denote underperformance vs. VBINX at Line 28 in the Table. Purple highlights denote Balance Sheet issues and shortfalls. Net Present Value (NPV) inputs are described and justified in the Appendix to Week 256: Briefly, Discount Rate = 9%, Holding Period = 10 years (no dividends accrue in 10th year), Initial Cost = average stock price over the past 50 days (corrected for transaction costs of 2.5% when buying ~$5000 worth of shares). Dividend Growth Rate is the 10-Yr CAGR found at Column H. Price Growth Rate is the 16-Yr CAGR found at Column K (http://invest.kleinnet.com/bmw1/). Price Return (from selling all shares in the 10th year) is corrected for transaction costs of 2.5%. The Discount Rate of 9% approximates Total Returns/Yr from a stock index of similar risk to owning a small number of large-cap stocks, where risk is mainly due to “selection bias.” That stock index is the S&P MidCap 400 Index at Line 33 in the Table. The ETF for that index is MDY at Line 27.
Post questions and comments in the box below or send email to: irv.mcquarrie@InvestTuneRetire.com
So, let’s revisit the large and well-established Food & Beverage companies to see which are doing well from an investor’s standpoint. We need to know how much refined sugar contributes to their prosperity, as opposed to milk, those being the top revenue producers. Has publicity about the detrimental effects of refined sugar been effective? In other words, are sugary soft drink sales still rising and milk sales still falling?
Mission: Apply our standard spreadsheet analysis to Food & Beverage companies on the 2016 Barron’s 500 List that have had their stock traded long enough to appear on the 16-Yr BMW Method list.
Execution: see Table.
Administration: We find that 19 companies meet the requirements for size and longevity. But only 8 are Dividend Achievers (see Column AD in the Table), and only 4 of the 16 dividend payers have clean Balance Sheets, HRL, INGR, KO and ADM (see Columns P-R). This tells me that the largest and best-established food companies are struggling. Their managers must be having a hard time figuring out how to grow sales faster than the rate of population growth. A favorite tactic is to have a large advertising budget to promote products that the consumer is expected to like (based on marketing studies). That strategy has pushed Coca-Cola and PepsiCo to the top of the pack, with market capitalizations more than 4 times higher than the next largest food processor: General Mills (GIS; see Column AA in the Table).
Bottom Line: Food & Beverage stocks are thought to be “defensive” because of being in the S&P Consumer Staples industry. However, they’re commodity-related (high risk/high reward) because of being tied to global weather cycles. In my opinion, only 2 of the 19 companies in the Table are sufficiently safe and effective for your retirement portfolio (HRL and KO). Procter & Gamble (PG) is perhaps a better way to invest in Consumer Staples (see Line 23 in the Table).
Coca-Cola (KO) and/or PepsiCo (PEP) dominate sales for sugary soft drinks in every country, even though the sales of such drinks have fallen for 11 yrs in a row, and great efforts have been made to find healthy alternatives. Coca-Cola still derives 70% of its revenue from sugary soft drinks, even though it has diversified into milk (Fairlife), fruit juice (Minute Maid, Simply Orange), sugary vegetable drinks (Suja Juice, Fuze, Odwalla), energy drinks (Monster), and Coca-Cola Life that uses the natural sweetener Stevia. The good news is that the detrimental effects of sugary soft drinks have become well known and consumers expect companies do something about it. Both PepsiCo and Coca-Cola appear to be making every effort to comply, while continuing to rely on the aggressive marketing of sugary soft drinks. In summary, the trendline for sugary soft drink sales is tilting downward while milk continues to fall without pausing.
With regard to milk sales here in the US, the main processor, Dean Foods (DF), almost faced bankruptcy because sales have fallen 30% since 1975. Dean Foods survived by splitting off its most successful subsidiary, WhiteWave Foods, the producer of Horizon Organic milk and Silk soy milk. “The move was designed to get investors to pay more for shares in a business unit with higher profit margins and faster growth prospects than conventional milk.”
Kroger (KR) operates 16 dairies that distribute milk to 34 states, and Coca-Cola (KO) has assembled a large group of dairy co-operatives to produce “ultra-filtered milk.” That new technology separates milk ingredients then recombines those selectively to produce a more nutritious product called "Fairlife," which has half the sugar and twice the protein. Fairlife Milk is distributed to grocery stores nationwide by the Minute Maid division, and is currently priced at an 11% premium to Parmalat Milk in Wal-Mart Stores. Fairlife Milk has been available for less than two years; people who shop with food stamps presumably don’t yet know its benefits and would perhaps shy away from paying the 11% premium price even if they knew.
Risk Rating: 6 (where 10-Yr Treasury Notes = 1, S&P 500 Index = 5, gold bullion = 10)
Full Disclosure: I dollar-cost average into KO, and also own shares of HRL and PG.
NOTE: Metrics are current for the Sunday of publication. Red highlights denote underperformance vs. VBINX at Line 28 in the Table. Purple highlights denote Balance Sheet issues and shortfalls. Net Present Value (NPV) inputs are described and justified in the Appendix to Week 256: Briefly, Discount Rate = 9%, Holding Period = 10 years (no dividends accrue in 10th year), Initial Cost = average stock price over the past 50 days (corrected for transaction costs of 2.5% when buying ~$5000 worth of shares). Dividend Growth Rate is the 10-Yr CAGR found at Column H. Price Growth Rate is the 16-Yr CAGR found at Column K (http://invest.kleinnet.com/bmw1/). Price Return (from selling all shares in the 10th year) is corrected for transaction costs of 2.5%. The Discount Rate of 9% approximates Total Returns/Yr from a stock index of similar risk to owning a small number of large-cap stocks, where risk is mainly due to “selection bias.” That stock index is the S&P MidCap 400 Index at Line 33 in the Table. The ETF for that index is MDY at Line 27.
Post questions and comments in the box below or send email to: irv.mcquarrie@InvestTuneRetire.com
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