Consumer Staples

  • 25 Sep
    Not all related stocks are created equal, and HRL proves it

    Not all related stocks are created equal, and HRL proves it

    One of the regular themes of my posts for the last several months, as well as the trades I’ve been placing since the late winter and early spring months of this year, has been the need to focus on making my investment approach more conservative. That flies in the face of a lot of analysts and experts More →

  • 21 Sep
    Among Food stocks, PPC’s no turkey

    Among Food stocks, PPC’s no turkey

    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.



    Technical Profile

    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.


  • 22 Aug
    SAFM is a small-cap, defensive diamond in the rough

    SAFM is a small-cap, defensive diamond in the rough

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    Read More

    If the extended state of the market’s bull run – which is nearly 10 years in the running now – is starting to make you wonder how much longer the “good times” are going to last, you’re in a relatively small, but growing group of people that are becoming increasingly wary. One of the things that not a lot of people understand, however is that even in a bearish market, you can keep finding good stocks to invest in with good long-term growth potential, if you’re willing to be cautious and selective. You also have to be able to work with a long-term perspective, because if the economy and the market do begin to reverse, the turn lower can come very quickly; that often means that even stocks that right now are trading at great valuations and fit into the “bargain” category under current market conditions are at risk of following the broader market’s trend to the downside.

    One way you can try to minimize some of that risk is by focusing on stocks that analysts and experts like to call “defensive” in nature. These are businesses that offer products or services that are needed no matter what the economy is doing, so their revenues generally manage to be pretty stable. If they’re conservative about the way they manage their business, that usually means that even if their profits get squeezed by tighter economic conditions, they’ll be able to weather the storm better than most other stocks in more cyclic sectors and industries.



    One of the industries that fits into this “defensive” category is Food Processing. This is an industry that includes some big, well-known names like Kellogg Company (K), General Mills (GIS), Kraft-Heinz (KHC), Campbell Soup (CPB) and Tyson Foods (TSN). Over the last year or so, this is also an industry that has come under a lot of pressure by investors who have been concerned that consumer trends are shifting away from many of these traditional names to smaller, trendier companies who are perceived as offering healthier options. The bigger companies have been scrambling to find ways to adjust to this shift, but that has also created some nice value options in the industry with stocks that have a terrific fundamental profile to use as a baseline and the size, resources, and responsiveness to make the adjustments they need to stay relevant.

    One stock in this sector that I think has a great fundamental profile to work with, and appears to already be well-positioned to work with the trend toward healthier food options is Sanderson Farms Inc. (SAFM). This is a small-cap stock that a lot of people might not recognize at first blush; but this is a company with a singular focus. Investors who prefer to see a company with a diversified portfolio might look at the fact SAFM focuses exclusively on protein from poultry as a negative; but this is the third largest poultry processor in the United States, with a model that allows them to function profitably as a low-cost provider of protein products. As I think you’ll see, there is a pretty strong case to be made for this stock as a serious value opportunity, even under current market circumstances.



    Fundamental and Value Profile

    Sanderson Farms, Inc. is a poultry processing company. The Company is engaged in the production, processing, marketing and distribution of fresh and frozen chicken, and also preparation, processing, marketing and distribution of processed and minimally prepared chicken. It sells ice pack, chill pack, bulk pack and frozen chicken, in whole, cut-up and boneless form, under the Sanderson Farms brand name to retailers, distributors, casual dining operators, customers reselling frozen chicken into export markets. The Company, through its subsidiaries, Sanderson Farms, Inc. (Production Division) and Sanderson Farms, Inc. (Processing Division), conducts its chicken operations. Sanderson Farms, Inc. (Production Division) is engaged in the production of chickens to the broiler-stage. Sanderson Farms, Inc. (Foods Division) is engaged in the processing, sale and distribution of chickens. The Company, through Sanderson Farms, Inc. (Foods Division), conducts its prepared chicken business. SAFM has a current market cap of about $2.4 billion.

    • Earnings and Sales Growth: Over the last twelve months, earnings declined by more than 37%, while revenues were mostly flat. In the most recent quarter the picture was markedly improved, as earnings tripled and sales grew a little over 5%.
    • Free Cash Flow: SAFM’s free cash flow is healthy, at about $142.5 million.
    • Dividend: SAFM’s annual divided is $1.28 per share and translates to a yield of 1.18% 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 SAFM is $66.47 and translates to a Price/Book ratio of 1.56 at the stock’s current price. The stock’s historical average Price/Book ratio is 2.08, which puts a target price for the stock a little above $138 per share – nearly 33% above its current price. That puts the stock in a range it last saw during the last week of 2017.



    Technical Profile

    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 longer-term upward trend, and also informs the Fibonacci trend retracement lines shown on the right side of the chart. After reaching a peak around $175 in early December of last year, the stock began an accelerated and extended drop to a downward trend low around $97 by June of this year. Since finding that bottom, the stock has been hovering in a range between $97 at support and resistance at around $109 per share. The 61.8% retracement line, at a price level around $113, is a pretty good visual reference for the point the stock would need to rally to in order to reverse the stock’s current downward trend.
    • Near-term Keys: A strong push above $113, with strong buying volume would act as a good signal the stock is about to shift back to the up side; that would provide a good entry point for a bullish trade by buying the stock outright or by working with call options. On the other hand, if the stock breaks down and drops below $97, the expectation would be that the long-term downward trend is likely to extend even further. That could provide a good opportunity to work the bearish side either by shorting the stock or working with put options, with a target price in the short term between $85 and $89 per share, with the stock’s 2-year low around $74 not out of the question.


  • 15 Aug
    Is SAM worth its current stock price?

    Is SAM worth its current stock price?

    In the constant search for value, one of the questions that inevitably have to ask yourself as an investor includes how the stock you’re looking at is likely to behave in different economic cycles. Some stocks are highly cyclic; the energy and automotive industries are good examples of market segments that respond well in certain economic phases, but really struggle in others. One of the things that a lot of investors like to do when they think the sustainability of current economic strength could be at risk is to start looking for stocks that are less cyclic in nature. Looking for companies that should do well in any economic cycle means focusing on businesses that consumers will always need to rely on no matter what the economy is doing. These are often called defensive stocks, and they often revolve around industries like utilities, healthcare, and food, among a few others.

    Another pocket of the market that can be pretty interesting is Beverages. Since they fit into the Food category, it’s usually pretty easy to buy into the idea that Beverage companies should have a pretty stable business model, no matter what the economy’s current state may be. You can actually drill down a little further, too to mine a sub-segment, Alcoholic Beverages to tap into (pun intended) what is perhaps an ironic twist on a defensive strategy, since sales of alcoholic drinks have shown a historical tendency to remain very healthy – and even to increase somewhat – when the economy is in decline.



    The truth is that alcoholic beverage companies generally do well in bullish economic cycles, as well as in bearish ones. That is another reason that this can be an interesting segment to pay attention to; but one of the difficulties about the industry is the relatively small market presence of U.S. companies. In the case of beer, for example, 85 percent of the beer made in the United States is owned by foreign companies. How do you play the industry? One of the notable names is Boston Beer Company (SAM). You may not recognize the company name right away, because the company doesn’t fit the description of a large-cap, blue-chip stock. It’s a good bet, however that you know about their products, especially if you are a beer drinker.

    The stock is interesting, because it has been following a very strong upward trend for a little more than the past year, increasing from about $130 to its current price a little above $290 per share. That’s a 124% increase in price in a little over a year; but the stock is also down since the last week of July from a high at nearly $330 per share. That’s down about 12% in just a few weeks. The stock more recently has been showing some strength, rebounding from a short-term low at around $270 per share. Is it poised to go back up and retest its $330 highs? Maybe; the company has some interesting fundamental strengths that indicate they are very well-managed and effective at managing their business. However, there are some important value-based measurements that I think suggest the stock is actually pretty risky right now. Let’s take a look.



    Fundamental and Value Profile

    The Boston Beer Company, Inc. is a craft brewer in the United States. The Company is engaged in the business of producing and selling alcohol beverages primarily in the domestic market and in selected international markets. The Company operates through two segments: Boston Beer Company segment, and A&S Brewing Collaborative segment. The Boston Beer Company segment comprises of the Company’s Samuel Adams, Twisted Tea, Angry Orchard and Truly Spiked & Sparkling brands. The A&S Brewing Collaborative segment comprises of The Traveler Beer Company, Coney Island Brewing Company, Angel City Brewing Company and Concrete Beach Brewing Company. Both segments sell low alcohol beverages. The Company produces malt beverages and hard cider at the Company-owned breweries and under contract arrangements at other brewery locations. As of December 31, 2016, the Company sold its products to a network of approximately 350 wholesalers in the United States and to a network of distributors. SAM has a current market cap of about $2.5 billion.

    • Earnings and Sales Growth: Over the last twelve months, earnings declined almost 16%, while revenues increased a little over 3%. The picture is better in the last quarter, with earnings growth at 260% and sales growing about 43%. Growing earnings faster than sales is hard to do, and generally not sustainable in the long-term; however it is also a positive mark of management’s ability to maximize business operations. The company’s margin profile shows that Net Income as a percentage of Revenues is pretty consistent, at about 10% for the last quarter as well as the trailing twelve months.
    • Free Cash Flow: SAM’s free cash flow is modest, at $86 million.  This number also has declined from about $130 million in mid-2017. Liquidity is somewhat of a question, since the company reported only about $76 million in cash and liquid assets in the last quarter.
    • Debt to Equity: A has a debt/equity ratio of .0. They have carried no debt on their balance sheet since the beginning of 2017. That helps to minimize the concern about the company’s cash position as it relates to their ability to service liabilities; but it still begs the question of what ability the company has to expand its operations, and how it intends to do it.
    • Dividend: SAM does not pay a 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 SAM is $37.99 and translates to a Price/Book ratio of 7.38 at the stock’s current price. Their historical average Price/Book ratio is 7.1, suggesting suggests the stock is currently trading at a slight premium – about 7.5% – to its intrinsic value. This view is supported by the fact the stock is also trading 15% above its historical Price/Cash Flow ratio. From a strictly value-based perspective, that means the stock could be at risk to drop to a low at around $245 at minimum. That would increase the stock’s drop from its all-time high at about $330 to more than 25%.



    Technical Profile

    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 longer-term upward trend, and also informs the Fibonacci trend retracement lines shown on the right side of the chart. After hitting its all-time high, the stock gapped down by more than $30 overnight to its latest low support level around $273 per share. That support is also validated by the 38.2% Fibonacci retracement line. The stock is currently showing some nice positive momentum, so there could an opportunity to see the stock keep filling that late July gap; if it does keep rallying, however, look for resistance, however to show up somewhere in the $310 to $315 price range.
    • Near-term Keys: Buying volume over the last few days that the stock has been rebounding from the $273 level is significantly lower than the volume the stock has seen in the past month, which calls into question how likely the stock is to keep pushing higher. I see that as an early sign of weakness in the stock, which I believe makes the downside risk more compelling than the upside opportunity. However, a good opportunity to work the bearish side by shorting the stock or working with put options would also not have a reasonable probability of success unless the stock breaks its support as shown by the 38.2% retracement line at $259. If a drop below that level happens, the stock could easily push straight through the 50% line, all the way to the 61.8% line at around $215 per share. It is also interesting that $215 would act as the first sign of a good value play as well, since at the point the stock would be trading at a discount of roughly 20% below its historical Price/Book ratio.


  • 07 Aug
    KR is still a screaming buy despite its recent rally

    KR is still a screaming buy despite its recent rally

    Two months ago, I wrote about The Kroger Company (KR) and predicted the stock was set to reverse its long-term downward trend in a big way. I’m generally not the type of person to pay myself on the back when something like that works out in my favor, but since the stock was below $25 then, and as of this writing is surging above $30 – that’s more than 20% in two months, if you’re keeping track – I feel pretty good about that prediction.

    The other, more important reason that it seems like a good time to revisit this stock is because in spite of this nice, big rally, the stock is still undervalued. That’s pretty remarkable considering how far the stock has already moved, but it means that there is still plenty of good opportunity to work with a stock with some really terrific fundamental strength behind it and a management team that is actively working to stay competitive with bigger companies like Amazon.com (AMZN), Target Stores (TGT) and Walmart (WMT). Those are also stocks that get a lot more buzz in the media but whose value proposition is significantly less compelling. I still think that if you’re looking for a way to invest in the stock market defensively using the Consumer Staples sector, KR is one of the best plays available.



    The Kroger Company (KR) is one of the most well-established, nationwide names in the grocery business, and they’ve held up well for decades even as companies like WMT and AMZN have pushed their way in and changed the competitive landscape of their industry. Not only am I willing to bet there is a Kroger-owned grocery store close to where you live, I’m also going to go out on a limb and say that you probably visit that store a handful of times every month at least. That is the kind of “stickiness” that analysts like to point to when they look for companies that will generally hold up in a troubled economy. 

    This is a company that has faced challenges from competitors large and small and manages to find its own way to not merely survive, but remain competitive and relevant. In just the last month, I’ve watched the company announce moves that should be useful to that end. Perhaps the most noteworthy just crossed newswires this morning, as the company is expanding its delivery portfolio. They already offered online order pickup and delivery from almost half of its stores nationwide via its Clicklist service, but is now adding the ability to ship home essential and non-perishable items at a lower cost using its Kroger Ship service. This is a non-subscription-based service, priced at $4.99 for two-day shipping on orders under $35, and free for orders above that minimum. It’s clearly designed to compete favorably with Amazon’s Prime Pantry service (which charges a higher delivery fee and requires an active Prime membership), and Target’s Restock service (next day delivery, free if you pay with a Target credit or debit card). The service is rolling out initially in four markets (Cincinnati, Houston, Louisville, and Nashville), with plans to expand to other markets in the next few months.



    Fundamental and Value Profile

    The Kroger Co. (Kroger) 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 current market cap of $24.1 billion.

    • Earnings and Sales Growth: Over the last twelve months, earnings increased by almost 26%, while sales increased at a modest rate of about 3.5%. The story is a little different, but not in a bad way in the most recent quarter, as KR saw an earnings improvement of 16% against an improvement of almost 21% in sales. The company operates with narrow margins, as Net Income was about 2.9% of Revenues for the last twelve months. This number improved in the most recent quarter to 5.39%.
    • Free Cash Flow: KR’s free cash flow is healthy, at about $824 million. That translates to a free cash flow yield of less than 5%, but remains adequate. The company has good liquidity, with $1.7 billion in cash and liquid assets.
    • Debt to Equity: the company’s debt to equity ratio is 1.74, which is a fairly high number under most circumstances, but which is also roughly inline with the industry average.
    • Dividend: KR pays an annual dividend of $.56 per share, which translates to an annual yield of 1.85% 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 uses the stock’s Book Value, which for KR is $8.54 per share. At the stock’s current price, that translates to a Price/Book Ratio of 3.54. I usually like to see this ratio closer to 1, or even better, below that level, but higher ratios in certain industries aren’t uncommon. The Food & Staples Retailing industry’s average is 3.1, putting KR bit above its counterparts. The stock’s historical Price/Book Ratio, however is 5.06, significantly above its current level. The stock would have to rally to about $43 per share to reach par with its historical average. 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: The stock appears to be breaking resistance at around $29.50, defined mostly by the trading range it held from early June until late July. Prior to that point, the stock had held in a range between $23 and $26 per share. The break above that range in early June confirmed a long-term downward trend reversal that had extended back to the beginning of 2016. The stock’s next most likely resistance level, based on previous pivots, is in the $33 to $35 price area, with support at the latest breakout level between $29.50 and $30 per share.
    • Near-term Keys: If you’re looking for a good long-term, value-oriented play, the stock remains an excellent bargain, so there is little reason not to take advantage right now. The stock is only about $1 away from its 52-week high at around $31.50, so if you’re looking for a shorter-term bullish trade using swing or trend strategies, you should probably wait until the stock breaks above that level, with a short-term target price around $35. If the stock breaks down below $30, it could see room to drop to between $26 and $27 fairly quickly, which could offer an attractive bearish setup using put options or by shorting the stock.


  • 17 Jul
    CPB could be an interesting value play

    CPB could be an interesting value play

    The Consumer Staples sector is segment of the economy that has underperformed the rest of the stock market, at least until the last few weeks. Trade tensions seem to be one of the primary factors right now that have increased uncertainty enough to prompt investors to start paying more attention to industries that fit into a more “defensive” economic profile, which means that stocks like Kroger Company (KR) and General Mills (GIS) in the Food Products industry, and CVS Health Corp (CVS) and Walgreens Boots Alliance, Inc. (WBA) have been getting a little more attention. CPB is another stock in the Food Products industry that is offering some pretty attractive opportunities right now.

    Like GIS, Campbell Soup Company’s (CPB) stock price suffered from criticism in the media about the company’s appeal to the growing Millennial target demographic, whose preferences seem to point away from traditional names to smaller, more “organic” brands. The concern is warranted, as it is incumbent on any company to make sure their products align with consumer tastes and preferences, no matter how well-established they may be. That said, there is a lot to be said for a company with the kind of name recognition and history behind it that CPB carries. Their fundamentals are quite strong, and their value proposition is more interesting now that it was just a couple of months ago. 

    Smaller and more buzz-worthy (and generally more expensive at the grocery store register) brand names right now certainly have their appeal; but one of the reasons CPB is seen as a defensive stock also comes because of their ability to make their products available at cheaper prices. If and when the economy begins to slow, more expensive, currently “sexier” products will likely be challenged to retain their sales and profits far more than better established, more affordable alternatives.



    Fundamental and Value Profile

    Campbell Soup Company (CPB) is a food company, which manufactures and markets food products. The Company’s segments include Americas Simple Meals and Beverages; Global Biscuits and Snacks, and Campbell Fresh. The Americas Simple Meals and Beverages segment includes the retail and food service channel businesses. The segment includes the products, such as Campbell’s condensed and ready-to-serve soups; Swanson broth and stocks; Prego pasta sauces; Pace Mexican sauces; Campbell’s gravies, pasta, beans and dinner sauces; Plum food and snacks; V8 juices and beverages, and Campbell’s tomato juice. The Global Biscuits and Snacks segment includes Pepperidge Farm cookies, crackers, bakery and frozen products; Arnott’s biscuits, and Kelsen cookies. The Campbell Fresh segment includes Bolthouse Farms fresh carrots, carrot ingredients, refrigerated beverages and refrigerated salad dressings; Garden Fresh Gourmet salsa, hummus, dips and tortilla chips, and the United States refrigerated soup business. CPB’s current market cap is $12.4 billion.

    Earnings and Sales Growth: Over the last twelve months, earnings and revenues have both increased, with earnings growth outpacing revenue growth (18.6% to 14.6%). Growing earnings faster than sales is difficult, and generally isn’t sustainable in the long term, but it is also a mark of management’s ability to maximize its business operations and manage costs. It should be noted that the company’s Net Income is less than 5% of Revenue, which indicates that they operate with a very narrow margin profile.

    • Free Cash Flow: CPB’s free cash flow translates to a Free Cash Flow yield of about  7.5%, which is less than I prefer, but still adequate. CPB’s total Free Cash Flow for the past year was $938 million, a number that has declined since the last quarter of 2016, when Free Cash Flow was a little over $1.15 billion.
    • Debt to Equity: CPB has a debt/equity ratio of 5.73. This number increased dramatically in the last quarter and makes CPB one of the most highly leveraged companies in the industry; the increase came as a result of the company’s acquisition of snack food maker Snyder’s-Lance in March of this year. Even with the increase, their balance sheet indicates operating profits are more than sufficient to service their debt, with adequate liquidity as well.
    • Dividend: CPB pays an annual dividend of $1.40 per year, which at its current price translates to an annual yield of about 3.39%. This is above the industry average as well as 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 CPB is $4.69 and translates to a Price/Book ratio of 8.78; this is generally above the level I prefer and is significantly above the industry average of 2.3. More importantly, however, the stock’s 5-year average Price/Book ratio is 10.5. A rally to par with its historical average would put the stock above $49. That offers an upside of almost 19% over the stock’s current price.



    Technical Profile

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

     

    • Current Price Action/Trends and Pivots: The red diagonal line traces the stock’s 2-year downward trend, from a high around $67 per share to a trend low early last month a little below $33 per share. The stock has rebounded from that point and is currently hovering in a narrow range between support around $40 and resistance in the $42.50 range. The red horizontal lines on the right side of the chart mark the stock’s Fibonacci trend retracement levels, which I expect to act as resistance against a reversal of the current downward trend. The stock would have to break two levels of resistance to reach the $49 target offered by the Price/Book analysis I outlined earlier. That isn’t unattainable, and if the stock can maintain the strong momentum it has shown since the beginning of June, it isn’t unreasonable to suggest that the stock could reach that level before the end of the year. On the downside, a drop below the stock’s current support around $40 would reconfirm the long-term downward trend, with support not expect to be seen until $34 or $35 per share.
    • Near-term Keys: A break to the $43 price range could act as a good signal to enter a bullish position on this stock, either by buying the stock outright or working with call options. If you’re working with a short-term trade, look for an exit in the $45 – $46 range; if you’re willing to work with a longer-term time frame, the $49 level marked by the 50% retracement line is a nice target. If the stock breaks down below $40, you might consider working with a bearish trade, either by shorting the stock or using put options.


  • 19 Jun
    PEP is up more than 10% in the last month; is there any upside left?

    PEP is up more than 10% in the last month; is there any upside left?

    Over the last few years, it seems that an ongoing discussion is the trend away from sugary soft drinks to healthier alternatives – or to snazzier, caffeine-laden energy beverages. That’s a little ironic when you look at the direction of PEP’s long-term trend, which is clearly up over the last five years, but has been showing uncertainty for the past year. More recently, the stock has been rallying from a intermediate, downward trend low at around $96 in early May to about $106 per share. Bullish investors will almost certainly be tempted to look at that rally as a strong indication of a trend reversal, and there do appear to be some signs that could be the case. There are other indicators, however that point in the opposite direction, meaning that bullish investors should be very cautious right now about jumping whole-heartedly into long stock or call option trades.

    PEP is a stock that, besides some of the elements that I’ll outline below, could be negatively impacted by trade tariffs between the U.S. and its trade partners. The recent imposition of tariffs by the Trump administration on steel and aluminum means that one of this business’ core costs is likely to increase for as long as tariffs and trade tensions continue. I think that this is also an example of a business that won’t simply absorb that increase into their existing cost structure, choosing instead to test consumer’s willingness to pay more for their products.



    Fundamental and Value Profile

    PepsiCo, Inc. is a global food and beverage company. The Company’s portfolio of brands includes Frito-Lay, Gatorade, Pepsi-Cola, Quaker and Tropicana. The Company operates through six segments: Frito-Lay North America (FLNA), Quaker Foods North America (QFNA), North America Beverages (NAB), Latin America, Europe Sub-Saharan Africa (ESSA), and Asia, Middle East and North Africa (AMENA). The FLNA segment includes its branded food and snack businesses in the United States and Canada. The QFNA segment includes its cereal, rice, pasta and other branded food businesses in the United States and Canada. The NAB segment includes its beverage businesses in the United States and Canada. The Latin America segment includes its beverage, food and snack businesses in Latin America. The ESSA segment includes its beverage, food and snack businesses in Europe and Sub-Saharan Africa. The AMENA segment includes its beverage, food and snack businesses in Asia, Middle East and North Africa. PEP has a current market cap of $149.4 billion.

    • Earnings and Sales Growth: Over the last twelve months, sales and earnings both increased only slightly. EPS growth was a little over 2% while sales growth was just higher than 4%. This is reflective, I believe of the general consumer trend I referred to earlier, with a large number of consumer shifting their beverage preferences away from traditional soft drinks.
    • Free Cash Flow: PEP has generally healthy free cash flow of a little over $6 billion over the last twelve months. This number has declined from a mid-2016 high of $ billion, and dropped sharply from the last quarter of 2017 from $7.2 billion. A confirmation of this as a generally negative measurement comes from net income versus revenues, which was 10.7% in September of 2017 but is now just over 7% as the most recent quarter.
    • Debt to Equity: the company’s debt to equity ratio is 2.91, which is high and by most indications would be a warning sign; however it should also be noted that this is pretty consistent with the Beverages industry. The company’s balance sheet indicates operating profits are adequate to service their debt, with more than adequate cash and liquid assets to supplement any operating shortfall.
    • Dividend: PEP pays an annual dividend of $3.71 per share, which translates to an annual yield of 3.5% 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 PEP is $7.75 per share. At the stock’s current price, that translates to a Price/Book Ratio of 13.63. This is almost twice as high as the industry average, which is 7.7, and almost 50% above the stock’s historical average of 9.2. A move to par with the historical average would put the stock’s price just above $70 per share – more than 30% below its current price, and at levels the stock hasn’t seen since late 2012.



    Technical Profile

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

    • Current Price Action/Trends and Pivots: PEP’s rally for the last month is pretty easy to see, and contrasted against the strength of the intermediate downward trend I’ve indicated with the diagonal orange line, would normally look like a breakout and subsequent trend reversal. The diagonal red line, however, traces the stock’s long-term downward trend, which has acted as strong resistance over the last couple of days and could be the mechanism that halts the stock’s short-term momentum. Near-term support (or downside) is back around $96, where the rally started last month, while a break the red trend line, to about $108 could give the room to to only around $113 per share before it finds its nearest support. From the standpoint of reward: risk, for a bullish trader that is only about $7 of upside potential versus nearly $10 of downside risk – hardly worth taking a bullish trade right now.
    • Near-term Keys: I expect geopolitical concerns could continue to weigh on this stock for the time being. If the stock manages to push to $108, I would look for positive momentum to break through the $113 before looking for a bullish trade. On the other hand, given the stock’s current pivot lower off of trend resistance, the time could be optimal right now for a bearish trade, either by shorting the stock or buying a put option.


  • 18 Jun
    WBA looks like it could be ready to break out

    WBA looks like it could be ready to break out

    If you pay attention to the Pharmacy segment of the Food & Staples industry, a lot of the attention over the last few months has focused on companies other than the stock I’m highlighting today. Amazon (AMZN) doesn’t work in this space, but after acquiring Whole Foods last year, the market loves to guess about their next vertical acquisition target. Rumors not long ago that they might start looking at ways to enter the pharmacy business sent a lot of investors running away from the established companies in this segment as quickly as possible. CVS Health Corporation (CVS) caught some buzz by announcing their intentions to acquire Aetna Inc. (AET), another example of vertical integration with some intriguing implications and opportunities for the future. And while Walgreens Boots Alliance Inc. (WBA) hasn’t been sitting idle, their acquisition of more than 1,600 Rite Aid (RAD) stores for about $3.6 billion in cash this spring didn’t really turn many heads. It’s a more traditional, consolidation-oriented transaction that I guess just doesn’t boast the sexy sheen that excites investors right now.

    That’s actually too bad, because if you dive into WBA’s fundamental and technical profile, you see a stock that looks like it could be poised on the verge of a bullish long-term trend reversal. It’s true that none of the effects – including the $3.6 billion spent to acquire those RAD stores, or the increase in debt that will probably be a natural result from it – have yet to be seen in any financial disclosures, but the company is scheduled for its first quarterly earnings announcement since the purchase closed on June 28. Depending on what kind of information is provided, that report could act as a strong upside catalyst. Let’s dive into the details as they currently stand.



    Fundamental and Value Profile

    Walgreens Boots Alliance, Inc. is a holding company. The Company is a pharmacy-led health and wellbeing company. The Company operates through three segments: Retail Pharmacy USA, Retail Pharmacy International and Pharmaceutical Wholesale. The Retail Pharmacy USA segment consists of the Walgreen Co. (Walgreens) business, which includes the operation of retail drugstores, care clinics and providing specialty pharmacy services. The Retail Pharmacy International segment consists primarily of the Alliance Boots pharmacy-led health and beauty stores, optical practices and related contract manufacturing operations. The Pharmaceutical Wholesale segment consists of the Alliance Boots pharmaceutical wholesaling and distribution businesses. The Company’s portfolio of retail and business brands includes Walgreens, Duane Reade, Boots and Alliance Healthcare, as well as global health and beauty product brands, including No7, Botanics, Liz Earle and Soap & Glory. WBA has a current market cap of $63.4 billion.

    • Earnings and Sales Growth: Over the last twelve months, earnings increased by more than 27%, while sales grew a little over 12%. It’s hard for a company to grow earnings faster than sales, and generally not sustainable over time. I do take the difference, however as a good sign that management is doing a good job of maximizing their business operations.
    • Free Cash Flow: WBA has solid free cash flow of a little over $6.3 billion over the last twelve months. This number has declined a bit from the first quarter of 2017, when it was a little over $7 billion, but is much higher over the last four years, when it hit a low in June of 2014 at around $2.5 billion. This number should drop again in the next quarter as a reflection of the RAD stores purchase, though exactly how much it will drop remains to be seen.
    • Debt to Equity: the company’s debt to equity ratio is .44, which is low and should generally be quite manageable. Long-term debt has also dropped by more 30% over the last two years, from around $19 billion to the levels reported in its last earnings report. This is another number that I expect will increase, but how much also remains to be seen.
    • Dividend: WBA pays an annual dividend of $1.60 per share, which translates to an annual yield of 2.5% 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 WBA is $28.42 per share. At the stock’s current price, that translates to a Price/Book Ratio of 2.25. This is inline with the industry average, which is 2.3, but below with the stock’s historical average of 2.9. A rally to par with the historical average would put the stock’s price above $82 per share – almost 30% above its current price. This really suggests the stock is legitimately undervalued right now.



    Technical Profile

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

    • Current Price Action/Trends and Pivots: WBA’s downward trend started in September of last year, which marks the beginning point for the diagonal red line on the chart above. The downward trend has extended to the current date, with the stock finding consistent support around $62 in April, May, and earlier this month. It also appears to be dropping lower right now off of pivot high resistance around $65 per share. That range – $62 to $65 – has defined a pretty consistent trading range since April, and would mark the levels the stock would need to break to either extend the downward trend even lower or reverse the trend and begin to reclaim its previous highs.
    • Near-term Keys: The key for WBA is most likely to come from its June 28 earnings announcement, so investors would be wise to watch the stock’s price from that point forward. A break above $65 would probably offer a good short-term bump to at least $70 per share, with its January peak around $80 – which would be nearly at par with its historical Price/Book ratio – attainable as a longer-term target. If the stock breaks below $62, it could drop as low as $51 before finding new support, based on historical pivots below the the $62 range.


  • 07 Jun
    KR could rebound and rise more than 25%

    KR could rebound and rise more than 25%

    We’ve watched volatility in the broad market increase significantly this year compared to last year, and some of that was a reflection of uncertainty about the economy’s health and sustainability moving forward. Those are conditions that usually give investors a reason to look for more conservative, defensive types of investments, and in the stock market, one of the sectors that usually provides that comes from the Consumer Staples arena. More →

  • 30 May
    CVS looks poised for a big break out – here’s why

    CVS looks poised for a big break out – here’s why

    Looking for a new investment to make can be an intimidating process, no matter how experienced you may be as an investor. There are so many ways to go about doing it, how are you really supposed to know what method works best? More →