Situation: “...your objective is to minimize your chances of dying poor” (William Bernstein). One way to do that is to invest in companies which meet an essential need, food being the most important. But which companies? First assess risk. We use 4 safety criteria: The company must 1) issue bonds rated A- or better by S&P (Column AC in the Table); 2) issue a stock that has a better performance record than SPY (the S&P 500 ETF) during the one year in the past ten that SPY had its worst returns–a metric we call Finance Value (Column G); 3) have a Return On Invested Capital (ROIC) over the Trailing Twelve Months (TTM) that exceeds the Weighted Average Cost of Capital (WACC) – see Columns V and W; 4) have a 10-yr Actual Rate of Return (Column E) that exceeds the 10-yr Required Rate of Return (Column D) calculated by the Capital Asset Pricing Model.
Mission: Screen large U.S. food & agriculture companies that meet these 4 safety criteria, using our Standard Spreadsheet.
Execution: see Table of 10 companies.
Analysis: Warren Buffett’s favorite metric is found in Column S of the Table: Return on Tangible Capital Employed. He thinks a 20% return for the last fiscal year is a good number. Three companies do so: HSY, PEP, KO. His second point (that the company be “run by able and honest managers”) is addressed in Morningstar reports (Column AQ) and is negatively impacted by the extent to which managers capitalize the company by issuing long-term bonds (Column Z). No companies have either a BUY or SELL rating from Morningstar but 4 have a Long-Term Debt to Equity ratio that is lower than 1.0 (ADM, WMT, HRL, COST). Mr. Buffett also states that a high Free Cash Flow Yield (Column K) reflects good management because Retained Earnings allow the company to expand operations (or pay down debt) at zero cost; 9 companies meet that standard (ADM, DE, CAT, HSY, KO, WMT, HRL, COST, UNP). His third point (that the stock be available at a sensible price) is addressed by 1-yr and 3-year Forward PEG ratios (Columns N and O); no company has PEGs lower than 2.5 at both intervals. There are 5 A-rated companies (Column AR): ADM, HSY, PEP, WMT, HRL. The most highly cited companies are ADM, HSY, WMT, HRL (3 times each).
Bottom Line: Investors think food-related stocks with strong fundamentals are safe bets. What is less widely known is that they’re growth stocks. Why? Because the world’s “middle class” demographic is growing faster than the world’s population, and that growth drives technological improvements in the production, processing, and distribution of foodstuffs.
Risk Rating: 5 (where 10-yr Treasuries = 1, S&P 500 = 5, and gold bullion = 10)
Full Disclosure: I dollar-average into CAT, PEP, KO, WMT, COST and UNP, and also own shares of ADM, DE, HSY and HRL.
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