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.

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