Situation: Stock market fluctuations continue but since 2009 the 250 day moving average (S&P 500 Index) has kept moving higher without a break. Why? We need to remember that this trend line is forecasting conditions 6-9 months down the road. Similarly, when the Federal Open Market Committee (chaired by Ben Bernanke) moves interest rates up or down the effect appears 6-9 months later.
Our ITR Master List (see Week 5) is based on fundamentals that long-term investors use in making stock purchase or sale decisions. That means we need to update our list quarterly. Our requirements for including a company in the Master List have become more stringent, given that the economy is struggling with slow growth and there is little prospect of a breakout in either direction. Unfortunately, it’s a “Muddle Through Economy." To make the list, we currently require companies to have:
a) at least an A- S&P rating for both debt and equity issues;
b) to have increased their dividend for at least 10 yrs in a row;
c) to have a dividend yield that is equal to or greater than the S&P 500 Index's (currently 1.9%).
In addition, companies (other than regulated utilities) have to meet certain standards pertaining to investment efficiency, dividend coverage, and long-term debt. In other words, ROIC (Return On Invested Capital) has to be 12% or greater, Free Cash Flow (as reported by the WSJ) must be sufficient to pay the entire dividend, and long-term debt has to be no greater than 35% of total capitalization. The attached Table lists 20 companies that presently meet those standards. Three have been dropped since the last Master List update (see Week 52) and no new companies have been added.
Bottom Line: This is not a good time to take a chance on a risky stock, so stick to the fundamentals. Take a look at the Table and think about starting a DRIP in one or two of the companies that have been struggling, and are therefore under-priced. Look for those that have a Durable Competitive Advantage (see Week 42), and projected 10-yr growth that exceeds the past 9 yrs of growth in Tangible Book Value (indicating an under-priced stock): Becton Dickinson (BDX), Chevron (CVX), ExxonMobil (XOM), 3M (MMM), and Medtronic (MDT). Then do your homework. Spend time reading articles in the responsible business press. For example, the kind of information you need on Medtronic is found in a lead story in Barron’s.
Post questions and comments in the box below or send email to: irv.mcquarrie@InvestTuneRetire.com
Sunday, September 30
Sunday, September 23
Week 64 - Food Production Companies
Situation: All investors are interested in gaining information about the Next Big Thing that will drive movement in the markets. We think that could be food production because
a) there’s not going to be enough land under cultivation to feed 9 Billion people by 2050; and
b) the land that is under cultivation will produce less food given there are more droughts such as those we’ve been experiencing.
Food production has many moving parts, most of which are in a continual state of flux and difficult to document. Weather, technology (“The Green Revolution”), soil erosion due to flooding and wind, global warming, population growth, availability of fuel for power grids and farm machinery, irrigation requirements for water, estate taxes that break up family farms, diseases that affect plants and animals, internet access to regulated futures exchanges and weather forecasting websites, diversion of food grains to fuel production, transportation of food to markets, and financing needed to purchase farm machinery, farm land, seeds, insecticides, veterinarian services, futures contracts, and well digging equipment. All of these listed items change from season to season and year to year, and impact market prices.
This last item listed above (financing for farmers) is of particular interest to us as investors but is, unfortunately, “flying under the radar.” That is, stocks and bonds aren’t issued by finance firms to successful farms for listing on public exchanges where fair prices can be arrived at through active trading. Family farms are about as amenable to high finance as family homes, and we have witnessed the results of what happened when bonds were created from thousands of mortgages: prices were inflated. So, “high finance” for a farmer = belonging to a farmer’s co-operative. These local/regional organizations pool money from several or many farmers to invest in farm necessities and market farm products. Farmers (i.e., the co-op members) share in the proceeds. If you buy gas at a Cenex station or enjoy Land O’Lakes butter, you’re paying into a farmer’s co-operative. The 100 largest co-operatives in the US earn over $200 Billion a year in revenue. The largest is CHS Inc. (Cenex), based in Minnesota, with sales of over $40 Billion/yr and profits of over $1.5 Billion/yr. They do pretty much all things “Ag” and in most every location, including operating their own oil refineries (Laurel, MT & McPherson, KS). Land O’Lakes is the second biggest co-operative, handling 12 Billion pounds of milk annually and operating the Purina Mills animal feed business.
Current estimates are that 1.3-1.6 Million more acres have to be brought under cultivation using Green Technology before there will be enough food to support a world population of 9 Billion by 2050. That will be even more difficult in the face of global warming. I decided to get a ringside seat to observe this fight against nature: I moved from Cleveland, OH, to Hastings, NE, last spring. I expected to have to wait a few years before a humdinger of a drought got everyone’s attention but soon found my timing was perfect. Our editorial office will remain in Baltimore, MD.
Bottom Line: Investors need to think about how large populations are fed, and then move beyond buying stock in McDonalds. The accompanying Table shows how the 25 food production companies in the S&P 500 Index are doing, i.e., not very well for the most part. People need food but many are out of work and unable to spend much on food.In addition, the costs of food production are soaring. The result is that companies attempt to pass along those increased costs by raising prices only to see people respond by buying less. Some companies have done well: Monsanto, Hormel Foods, General Mills, Potash, Flowserve, and FMC are sound enterprises that are relatively low-risk. However, this is widely known so their stock is somewhat overpriced. Higher risk names that are also sound enterprises include Caterpillar, Deere, Mosaic, and Dupont. Their stock is either fairly priced or underpriced.
For the seasoned investor, who knows fixed income investments are where the smart money hides out, there’s the Cenex preferred stock issue (CHSCP) paying 6.25% as of 9/12. Cenex is an $84 Billion company that shows strong continual growth due to its worldwide reputation in the food game. It’s a farmer’s co-operative so stock is not issued and it isn’t regulated by the SEC. What is known is that the company’s book value has grown at a rate of 9.65%/yr over the past 5 yrs. Bankruptcy is not even a remote possibility, yet it pays twice the interest of a US Treasury bond. Why? Because investors know nothing about farmer’s co-operatives and aren’t going to know anything until headlines appear in The WSJ such as: “Why isn’t there enough food?” and “Can Farmer’s Cooperatives be Capitalized Better?”
Post questions and comments in the box below or send email to: irv.mcquarrie@InvestTuneRetire.com
a) there’s not going to be enough land under cultivation to feed 9 Billion people by 2050; and
b) the land that is under cultivation will produce less food given there are more droughts such as those we’ve been experiencing.
Food production has many moving parts, most of which are in a continual state of flux and difficult to document. Weather, technology (“The Green Revolution”), soil erosion due to flooding and wind, global warming, population growth, availability of fuel for power grids and farm machinery, irrigation requirements for water, estate taxes that break up family farms, diseases that affect plants and animals, internet access to regulated futures exchanges and weather forecasting websites, diversion of food grains to fuel production, transportation of food to markets, and financing needed to purchase farm machinery, farm land, seeds, insecticides, veterinarian services, futures contracts, and well digging equipment. All of these listed items change from season to season and year to year, and impact market prices.
This last item listed above (financing for farmers) is of particular interest to us as investors but is, unfortunately, “flying under the radar.” That is, stocks and bonds aren’t issued by finance firms to successful farms for listing on public exchanges where fair prices can be arrived at through active trading. Family farms are about as amenable to high finance as family homes, and we have witnessed the results of what happened when bonds were created from thousands of mortgages: prices were inflated. So, “high finance” for a farmer = belonging to a farmer’s co-operative. These local/regional organizations pool money from several or many farmers to invest in farm necessities and market farm products. Farmers (i.e., the co-op members) share in the proceeds. If you buy gas at a Cenex station or enjoy Land O’Lakes butter, you’re paying into a farmer’s co-operative. The 100 largest co-operatives in the US earn over $200 Billion a year in revenue. The largest is CHS Inc. (Cenex), based in Minnesota, with sales of over $40 Billion/yr and profits of over $1.5 Billion/yr. They do pretty much all things “Ag” and in most every location, including operating their own oil refineries (Laurel, MT & McPherson, KS). Land O’Lakes is the second biggest co-operative, handling 12 Billion pounds of milk annually and operating the Purina Mills animal feed business.
Current estimates are that 1.3-1.6 Million more acres have to be brought under cultivation using Green Technology before there will be enough food to support a world population of 9 Billion by 2050. That will be even more difficult in the face of global warming. I decided to get a ringside seat to observe this fight against nature: I moved from Cleveland, OH, to Hastings, NE, last spring. I expected to have to wait a few years before a humdinger of a drought got everyone’s attention but soon found my timing was perfect. Our editorial office will remain in Baltimore, MD.
Bottom Line: Investors need to think about how large populations are fed, and then move beyond buying stock in McDonalds. The accompanying Table shows how the 25 food production companies in the S&P 500 Index are doing, i.e., not very well for the most part. People need food but many are out of work and unable to spend much on food.In addition, the costs of food production are soaring. The result is that companies attempt to pass along those increased costs by raising prices only to see people respond by buying less. Some companies have done well: Monsanto, Hormel Foods, General Mills, Potash, Flowserve, and FMC are sound enterprises that are relatively low-risk. However, this is widely known so their stock is somewhat overpriced. Higher risk names that are also sound enterprises include Caterpillar, Deere, Mosaic, and Dupont. Their stock is either fairly priced or underpriced.
For the seasoned investor, who knows fixed income investments are where the smart money hides out, there’s the Cenex preferred stock issue (CHSCP) paying 6.25% as of 9/12. Cenex is an $84 Billion company that shows strong continual growth due to its worldwide reputation in the food game. It’s a farmer’s co-operative so stock is not issued and it isn’t regulated by the SEC. What is known is that the company’s book value has grown at a rate of 9.65%/yr over the past 5 yrs. Bankruptcy is not even a remote possibility, yet it pays twice the interest of a US Treasury bond. Why? Because investors know nothing about farmer’s co-operatives and aren’t going to know anything until headlines appear in The WSJ such as: “Why isn’t there enough food?” and “Can Farmer’s Cooperatives be Capitalized Better?”
Post questions and comments in the box below or send email to: irv.mcquarrie@InvestTuneRetire.com
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