For the last few months, I’ve made defensive investing in the stock market a fairly regular theme of my daily posts. And while it isn’t unusual for me to cite concerns about trade tensions between the U.S. and its trading partners, that is just one reason that I think it’s smart to think about ways you can find value in the stock market right now. My biggest reason is far simpler: as we move into historically unprecedented territory for the bull market that began in 2009, I think you have to be more attuned than ever to the reality that no upward trend lasts forever. The elements that can force the market to finally turn and move even more than the 11% or 12% we saw in the early part of this year are hard to predict, because there isn’t really any one catalyst or set of catalysts that has set previous bear markets charging downhill. In 2000, it was the “dot-com bust”; in 2007, it was a financial crisis triggered by overaggressive lending policies.
What will be the straw that breaks the back of this particular bull market? That’s really anybody’s guess. It’s easy to point a finger at President Trump, simply because many of his ideas – about trade, taxes, and even interest rates – fly in the face of conventional wisdom, and he doesn’t seem to care what you or I, or anybody else really thinks about it. His behavior is disruptive and forces change, which is really the one thing the markets abhor more than anything else in the short term. The truth is that an extended trade war could be a big driver to a reversal of current economic strength in the U.S. economy, but it isn’t a given that it will. Gradually rising interest rates could also set the stage for a bubble-like burst – if the economy begins to show signs of accelerating growth that forces the Fed to change the pace and size of its current policy. Again, it’s a possibility, but not a given.
As uncertainties keep rising, expect the market to stay volatile. That means big short-term swings from high to low as investors keep trying to read the changing winds of market and political news. That also means that a lot of stocks that dominate headlines and media attention could be at risk in the short to intermediate term of extended price declines, which is another reason I think it’s smart to pay attention right now to stocks that tend to be less cyclic in nature and that are usually pretty resilient when economic trouble raises its head. The Consumer Staples industry is a good place to look, and Pilgrim’s Pride Corporation (PPC) is an interesting stock to keep an eye on.
Fundamental and Value Profile
Pilgrim’s Pride Corporation is a retail feed store. It is a producer and seller of chicken with operations in the United States, Mexico and Puerto Rico. It is engaged in the production, processing, marketing and distribution of fresh, frozen and value-added chicken products to retailers, distributors and foodservice operators. It offers a range of products to its customers through national and international distribution channels. Its fresh chicken products consist of refrigerated (non-frozen) whole chickens, whole cut-up chickens and selected chicken parts that are either marinated or non-marinated. Its prepared chicken products include ready-to-cook and individually frozen chicken parts, strips, nuggets and patties, some of which are either breaded or non-breaded and either marinated or non-marinated. As of December 25, 2016, the Company marketed its portfolio of fresh, prepared and value-added chicken products across the United States, Mexico and in approximately 80 other countries. PPC’s current market cap is $4.7 billion.
- Earnings and Sales Growth: Over the last twelve months, earnings decreased by more than 43% while revenues posted an increase of almost 26%. That’s typically a sign the company is becoming less efficient, and the truth is that PPC has been under pressure from rising material costs, such as feed, and in interest expense. The company also operates with a pretty narrow margin profile, which isn’t unusual in the Foods industry. Net Income over the last year was 5.3% of Revenues, and decreased in the last quarter to about 3.65%. Not all of the news is bad: export volumes and revenues, from Mexico as well as Europe are expected to increase into next year, along with volume in the U.S., and the company is positioning itself to benefit from expanding its products into wider-margin areas including prepared foods.
- Free Cash Flow: PPC’s free cash flow is quite healthy, at more than $472 million over the last twelve months. That translates to a Free Cash Flow Yield of 10%, which is pretty attractive.
- Debt to Equity: PPC has a debt/equity ratio of 1.26, which is higher than I normally prefer to see, but is also not unusual for food stocks. The company’s balance sheet demonstrates their operating profits are more than adequate to service their debt.
- Dividend: PPC does not pay an annual dividend.
- 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 PPC is $8.25 per share and translates to a Price/Book ratio of 2.28 at the stock’s current price. Their historical average Price/Book ratio is 4.3, which suggests the stock is trading right now at a discount of nearly 88%, and that puts the stock’s long-term target at about $35.50 per share. That is just a couple of dollars per share away from the stock’s 52-week high, reached in November of last year before the stock began its current downward trend.
Here’s a look at the stock’s latest technical chart.
- Current Price Action/Trends and Pivots: The red diagonal line measures the length of the stock’s downward trend from December 2017 to its low in August of this year; it also informs the Fibonacci trend retracement lines shown on the right side of the chart. Since finding that bottom at around $16, the stock has hovered in a narrow range between $16 on the low side and $19 on the high side. That marks a consolidation range that could provide a catalyst for a sizable trend reversal – but the stock would need to break above that resistance at $19 first, and probably get to about $21 to make that trend reversal sustainable.
- Near-term Keys: This is an interesting stock because its price activity over the last few years doesn’t really indicate much in the way of downside that the stock hasn’t already seen. It could, of course, break below $16 and test even lower ranges that date as far back as 2013, when the stock was below $10; but given the size of the decrease the stock has already seen since December of last year, and the generally positive fundamental strength the company demonstrates, that seems unlikely. The long-term value proposition is excellent, and so if you’re looking for a straightforward value play, and are willing to work with a long-term perspective, this could be an excellent stock to consider. If you’re a short-term trader, don’t consider buying the stock for any kind of momentum or swing-based move until the stock breaks resistance at around $19; the best signal point would likely be at around $21 based on the stock’s current price levels. At that point, there could be a good opportunity to buy the stock or to start working with call options with an eye on the $25 price level as indicated by the 38.2% retracement line.