Defensive Stocks

  • 12 Dec
    ADM is an interesting defensive play – is it a good value?

    ADM is an interesting defensive play – is it a good value?

    Bearish pressures for the past few days have pushed the market back down near to its 52-week lows. It seems like each time the market tests its major support, more and more talk starts to be about the increasing likelihood that the longest bull market in recorded history is finally going to end. So far this year, each time that’s happened the market has managed to stage yet another rally; but given the extremely extended state the market remains in, even being in corrective territory right now does seem to suggest that support will probably only hold for long. More →

  • 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 →

  • 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 →

  • 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 →

  • 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.


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