Consumer Staples

  • 04 Dec

    CAG looks like a smart value play

    Monday started the week off with a bang, as the Trump administration announced that it had reached an agreement with China to put a temporary pause on the imposition of any new tariffs. The market cheered the news, hopeful that this will be a positive step that creates constructive discussion toward a long-term compromise that works for both countries. That could give the market a pretty good lift in the short-term, but it doesn’t mean that it’s time to jump back into market with both feet yet. I think it’s still smart to be cautious. More →

  • 30 Nov
    Food stocks can be a good defensive play – but FDP is a sucker’s bet

    Food stocks can be a good defensive play – but FDP is a sucker’s bet

    Until the beginning of this week, the market seemed to be getting more and more bearish every day. After watching the major market indices all decline by more than 10% in October, they staged a short-lived rally at the beginning of November, only to turn back again with a resounding series of consecutive down days last week that pushed the market once again into correction territory. This week has seemed like something of a respite as the market has has rallied off of lows only a little above the 52-week bottom it reached in April. That could be a good thing, but it isn’t a given, More →

  • 27 Nov
    KR is a stock that you shouldn’t ignore

    KR is a stock that you shouldn’t ignore

    With market uncertainty increasing, it’s natural to wonder what kind of stocks make the most sense to pay attention to. How do you keep your eyes out for decent opportunities to make your money working for you when the market looks like it could be at a tipping point and broad market is increasing? I think a good approach is to look for conservative opportunities that offer a lower amount of risk than trying to find the next high flyer. That means focusing your attention on segments of the market that should see stable revenue flows, with relatively consistent profit levels even if the economy does in fact reverse and turn bearish.

    One of the areas I really like to work with in these kinds of conditions is Consumer Staples. Food stocks make a lot of sense to me, because even when the economy struggles, consumers are still going to need to put food on their tables. Grocery stores like The Kroger Co. (KR) offer a similar kind of profile.

    KR is an interesting company; they tend to get marginalized a little bit because of competitive pressure from bigger competitors like Walmart (WMT), Target Stores (TGT) and even Amazon (AMZN), but this is a company that has shown a consistent ability over the years to survive and successfully transform itself to stay relevant and maintain its presence. They also don’t mind taking calculated risks by setting their sights on new business streams that they think offer a good opportunity to expand their business. An interesting example of this is the company’s recent introduction of Bromley’s for Men, a line of men’s grooming products, including razors, shaving cream, lotion and face cleansers. It’s a clear play to take a page from stocks that help to stock the store’s shelves, like Proctor & Gamble’s (PG) Gillette brand as well as the shaving clubs that have been seeing an increase in popularity.



    Fundamental and Value Profile

    The Kroger Co. (KR) manufactures and processes food for sale in its supermarkets. The Company operates supermarkets, multi-department stores, jewelry stores and convenience stores throughout the United States. As of February 3, 2018, it had operated approximately 3,900 owned or leased supermarkets, convenience stores, fine jewelry stores, distribution warehouses and food production plants through divisions, subsidiaries or affiliates. These facilities are located throughout the United States. As of February 3, 2018, Kroger operated, either directly or through its subsidiaries, 2,782 supermarkets under a range of local banner names, of which 2,268 had pharmacies and 1,489 had fuel centers. As of February 3, 2018, the Company offered ClickList and Harris Teeter ExpressLane, personalized, order online, pick up at the store services at 1,056 of its supermarkets. P$$T, Check This Out and Heritage Farm are the three brands. Its other brands include Simple Truth and Simple Truth Organic. KR has a market cap of $23.6 billion.

    • Earnings and Sales Growth: Over the last twelve months, earnings increased by about 5%, while sales were mostly flat, increasing about 1%. In the last quarter, earnings and sales both declined, a fact that has been one of the biggest catalysts for the market to push the stock down off of its recent highs. Management attributed most of that decline to costly store redesign efforts the company has been engaged in for a large percentage of its stores nationwide, but that has been largely completed and that management expects will translate to better bottom-line improvement in the quarters ahead. The company operates with narrow margins, as Net Income was about 3% of Revenues for the last twelve months. This number dropped in the most recent quarter to 1.8%.
    • Free Cash Flow: KR’s free cash flow is healthy, at about $685 million. That translates to a free cash flow yield of less than 5%, but remains adequate. The company has good liquidity, with $1.3 billion in cash and liquid assets, a number that declined from the last quarter but still remains healthy.
    • Debt to Equity: KR has a debt/equity ratio of 1.65. This is higher than I usually prefer to see, but isn’t unusual for Food Retailing stocks. The company’s balance sheet indicates that operating profits are more than adequate to repay their debt. It is also noteworthy that this number dropped in the last quarter from 1.74.
    • Dividend: KR pays an annual dividend of $.56 per share, which translates to a yield of about 1.86% at the stock’s current price. This is roughly inline with the industry average, but a bit below the S&P 500 average of 2.0%.
    • Price/Book Ratio: there are a lot of ways to measure how much a stock should be worth; but one of the simplest methods that I like uses the stock’s Book Value, which for KR is $9.21 per share. At KR’s current price, that translates to a Price/Book ratio of 3.22 at the stock’s current price. The industry average is 3.2, and the stock’s historical average is 5.06. A rally to par with the historical average would put the stock above $46 per share. That provides a long-term target price near to the stock’s 2-year high point in early 2016 and serves as a nice reference for the stock’s value opportunity.



    Technical Profile

    Here’s a look at the stock’s latest technical chart.

     

    • Current Price Action/Trends and Pivots: After rebounding from a pivot low in early October at around $27, the stock peaked early this month at around $32 before dropping back to its current range. It looks like it could be hitting another pivot low right now, with a bounce right off of support a little below $30. A push above $33 per share would mark a break above the range the stock has held since September, and could signal a longer upward trend could be building. The stock’s strongest support right now is around $27; a drop below that point could see the stock drop back into the low $20 range it saw earlier in the year.
    • Near-term Keys: If you don’t mind being aggressive, and little bit speculative, there could be an opportunity to buy the stock or work with call options right now, with an eye on the $33 range as a near-term profit target. If the stock breaks down below its immediate support at $29, you could also consider shorting the stock or buying put options with a target low around $27. I think the best opportunity, however lies in the long-term value potential the stock offers, with a pretty conservative profile that I think makes it more conservative, defensive-oriented stock to work with right now.


  • 23 Nov
    Happy Black Friday! Which stock is a better value right now – TGT or WMT?

    Happy Black Friday! Which stock is a better value right now – TGT or WMT?

    It’s an annual thing – the day after Thanksgiving marks the official start of the holiday shopping season. Anxious to get a jump on the best deals of the season, shoppers line up outside stores all over the country. It also marks a point in the year when the stock market starts to pay even closer attention to the retail sector than normal. More →

  • 31 Oct
    Getting defensive: how GIS might be a calm center amidst the market’s storm

    Getting defensive: how GIS might be a calm center amidst the market’s storm

    There’s nothing quite like a volatile stock market to start rattling nerves and make people wonder how long it’s going to last, or if the market will ever be the same again. After coming within a whisper of official bear market territory on Monday, stocks rebounded strongly, as all three major market indices rallied more than 1.5%, driven in part by good earnings report from the tech sector and comments from President Trump More →

  • 22 Oct
    CLX: high dividend, but is it a good value?

    CLX: high dividend, but is it a good value?

    As the market has become more and more uncertain throughout this year, I’ve written more frequently about taking a more conservative, “defensive” approach to investing. There are a lot of different ways to think about being defensive when you believe market conditions are becoming more bearish. More →

  • 19 Oct
    Want to get defensive? Stay away from this value trap

    Want to get defensive? Stay away from this value trap

    The market’s volatility over the last week and a half has started to put a lot of people on edge. I’ve noticed an increasing number of talking heads on market media starting to throw out words that just don’t apply to the market yet, like “correction” and even “bear market” in a few cases. It’s pretty easy to get caught up in the hand-wringing and anxious nerves that always seem come when market volatility starts to pick up. More →

  • 15 Oct
    TR makes tasty treats – their stock could be one, too

    TR makes tasty treats – their stock could be one, too


    More than two decades ago, I was just getting my start in the financial industry, working as a licensed representative for a major mutual fund company. In order to help new hires like me get more familiar with what mutual funds were about, and to start learning how the stock market worked, my employer encouraged studying the investment philosophies of a lot of the most well-known fund managers of the day. At the time, that meant paying attention to the “rock stars” of the mutual fund industry, and at that time there weren’t too many more popular or well-known names than Peter Lynch. More →

  • 10 Oct
    Is SJM undervalued enough to be a smart defensive investment?

    Is SJM undervalued enough to be a smart defensive investment?

    Over the last week, uncertainty appears to have become the primary theme of the market, as concerns over interest rates and global growth are starting to take hold and lead investors to question the market’s ability to sustain its long, bullish trend. As of this writing, in fact, the S&P 500 is sitting right on top of its 50-day moving average line, an indicator that a lot of technical investors like to use as a visual queue for the market’s intermediate-term trend. A break below this line could signal at least a short-term reversal, with more downside ahead that could see the market drop as much as another 4% before finding its next support level. That’s not exactly correction territory, but it is enough short-term downside to keep uncertainty high and prompt investors to start looking for “safe haven” investments that offer some measure of protection should things get even worse.

    If the market keeps dropping, I think there could be some very interesting opportunities in defensive industries, and as I wrote yesterday, I think some of the best valuations in the market right now are coming in the consumer sSJMles sector in general, and the food industry in particular. If you’re looking to be conservative about the positions you take, it’s smart to be selective about how many stocks you buy in a single industry, and so even though I’ve been highlighting different stocks in the industry that I think offer interesting value propositions, you should take some time to compare each one carefully and decide for yourself which ones you think would offer you the right mix of opportunity, fundamental strength, and risk management.

    One food company that I do think is really interesting right now is The J.M. Smucker Company (SJM). The name probably makes you think about the same products I do – fruit spreads. That’s because the company’s namesake Smucker’s brand is the #1 fruit spread brand; but this is a company that also owns the leading peanut butter (JIF), coffee (Folger’s), and dog snack (Milk-Bone) brands. When you consider they own other well-known brands like Crisco, Dunkin’ Donuts, Kibbles ’n Bits, and Carnation, to name just a few, you have a company with a pretty well-diversified product line that covers a pretty broad spectrum of the packages food industry. There are some risks about the food industry that have started to impact some important measurable components of SJM’s profile; however for the most part, this is a company with strong fundamentals, including good cash flow, decent (albeit declining) margins, and manageable debt. They also carry a very attractive dividend yield right now, with a very compelling long-term value proposition. Let’s take a look.



    Fundamental and Value Profile

    The J. M. Smucker Company is a manufacturer and marketer of branded food and beverage products and pet food and pet snacks in North America. The Company’s segments include U.S. Retail Coffee, U.S. Retail Consumer Foods, U.S. Retail Pet Foods, and International and Foodservice. The Company’s U.S. retail market segments consist of the sale of branded food products to consumers through retail outlets in North America. In the U.S. retail market segments, the Company’s products are sold to food retailers, food wholesalers, drug stores, club stores, mass merchandisers, discount and dollar stores, military commissaries, natural foods stores and distributors, and pet specialty stores. In International and Foodservice, the Company’s products are distributed domestically and in foreign countries through retail channels and foodservice distributors and operators, such as restaurants, lodging, schools and universities, healthcare operators.SJM’s current market cap is $11.6 billion.

    • Earnings and Sales Growth: Over the last twelve months, earnings increased almost 18%, while sales growth increasing not quite 9%. Growing earnings faster than sales is difficult to do, and in the long-term generally isn’t sustainable, but it is also a positive mark of management’s ability to maximize business operations. In the last quarter, earnings decreased almost 7%, despite an increase in sales of almost 7%. That points to increasing costs, which right now are coming from from foodstuffs as well as transportation costs. This reality is also reflected in SJM’s margin profile; over the last twelve months, Net Income was nearly 18% of Revenues, but declined in the last quarter to about 7%. That is a red flag, but the company’s balance sheet indicates that their margins remain adequate.
    • Free Cash Flow: SJM’s free cash flow is good, at a little over $800 million for the trailing twelve month period; that translates to a Free Cash Flow yield of about 7%.
    • Debt to Equity: SJM has a debt/equity ratio of .78, a relatively low number that indicates the company operates with a generally conservative philosophy about leverage. This number did increase significantly in the last quarter from .59, which I believe is a reflection of their acquisition of pet food company Ainsworth in May of this year for $1.7 billion. In the last quarter, their long-term debt increased from about about $4.7 billion to almost $6.2 billion, suggesting the larger portion of the purchase was financed by debt.
    • Dividend: SJM pays an annual dividend of $3.40 per share, which translates to a yield of 3.33% at the stock’s current price.
    • Price/Book Ratio: there are a lot of ways to measure how much a stock should be worth; but one of the simplest methods that I like uses the stock’s Book Value, which for SJM is $69.72 per share and translates to a Price/Book ratio of 1.46 at the stock’s current price. Their historical Price/Book average is 2.04, which suggests that the stock is trading at a discount right now of about 39.5%. Their Price/Cash Flow ratio offers an even more optimistic perspective, since it is currently running 62% below its historical averages. Between the two measurements, the long-term target price, based strictly off of value analysis could lie anywhere in a range between $142 and $165 per share. The low end of that range was last seen in the early spring of 2017.



    Technical Profile

    Here’s a look at the stock’s latest technical chart.

     

    • Current Price Action/Trends and Pivots: The chart above traces the stock’s downward trend from late April of 2017, where it peaked at around $144 per share, to its trend low point at close to $100. It also informs the Fibonacci retracement lines shown on the right-hand side of the chart. The stock is currently sitting near that trend low, with strong support at that point from previous pivot lows in November 2017 and June of this year. The stock is about 15% below the resistance marked by the 38.2% Fibonacci retracement line, so a bounce higher off of support could see the stock revisit that level fairly quickly. A break below current support at around $100 could give the stock additional room to drop to multi-year lows that may not find support until around $90 per share – a level last seen in early 2013.
    • Near-term Keys: A strong bullish pivot from the stock’s current support level could be taken as a good signal for a short-term bullish trade using call options or even buying the stock, with a near-term target between $110 and $115 per share. The strength of the stock’s downward trend, however could push the stock below its current support at $100, which would be a strong indication to consider shorting the stock or working with put options. Given the stock’s valuation measurements and general fundamental strength, including a very healthy dividend, the current price represents a very impressive bargain if you’re working with a long-term time horizon and don’t mind accepting some nearer-term price volatility.


  • 09 Oct
    Interest rate fears are making the market jittery – that could be a good thing for defensive stocks like TAP

    Interest rate fears are making the market jittery – that could be a good thing for defensive stocks like TAP

    Over the last few days, one of the things that has put the market a little bit on edge is concern that interest rates could be forced higher sooner than possible. Fed chair Jay Powell gave investors room to start feeling anxious last week when during a televised question and answer session, More →

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