- Last week, we discussed why investing in agriculture is important and also 7 different investing opportunities in the agriculture sector.
- I see the agriculture sector as an excellent play in this current environment because it offers no correlation to the current exuberant stock market and there is high potential upside coming from a rebound in food prices.
- A big part of the food chain is seafood, so today we are going to analyze the sector by discussing seafood stocks.
Seafood consumption is relatively small in comparison to land-based animal proteins. An average American eats 138.1 pounds of beef and chicken per year while only 14.1 pounds of seafood. However, the attitude toward seafood is growing more and more positive which should bode well for seafood producers.
Google searches for ‘seafood’ have been growing in the last 7 years while searches for ‘organic’ have actually been declining over the past 14 years.
What’s also important to know is that wild catches are stable as fishing hasn’t been sustainable in the last few decades, but aquaculture is increasing.
The chart above also shows that demand for seafood is expected to grow in the future showing that there is a positive structural investing trend.
So the trend is positive, but before discussing investing opportunities in the sector, it’s important to mention the risks.
Seafood is cyclical.
In farming, higher investments can lead to higher supply and if demand doesn’t grow, the market can enter a long cloudy period just as it can also enter a sunny period of high demand like we are in now. Further, low food prices lead to lower aquaculture input costs and thus margins are higher. Higher feed prices may suppress the excellent margins we’ll discuss further later on.
As for wild fishing, fisheries can easily get overfished, weather can have an impact, and the fishing quotas can be changed or even completely abolished for a period of time. Nevertheless, let’s dig into some stocks to see what the risk reward in relation to valuations is.
High Liner Foods (TMX: HLF, OTCPK: HLNFF)
High Liner Foods is the leading North American processor and marketer of value-added frozen seafood.
This first seafood stock already looks like an interesting investment. We’re talking about a company that has quadrupled its revenues and net income in the last 10 years with no dilution since 2008.
However, things haven’t been going that well lately as there has been no revenue growth over the past 3 years and earnings have declined. As always, the market prefers to look at the short term instead of at the long term. So HLF is really an interesting research option to see whether the difficulties are temporary or permanent. Nevertheless, the price to earnings ratio is just 14 and the dividend yield is 4% which is way below market averages.
Clearwater Seafood (TSX: CLE)
CLE has a PE ratio of 14 and the stock price is trading at 52-week lows. The company has lost its monopoly on Arctic surf clam and saw its revenue significantly decline in the last quarter. Perhaps such declines are excellent investing opportunities as the long term trend in seafood is positive.
Marine Harvest (OTCPK: MHGVY)
Marine Harvest focuses on salmon production. The company has just recently delisted from the NYSE but is still trading over the counter and in Oslo. However, the company has a PE ratio of just 10 and has benefited enormously from the growth in the salmon market which allows for a 10% dividend yield.
To see whether Marine Harvest is still a good investment, one must look at the salmon market which we can’t dive deep into in this article, but the consumption trend despite the constant price increases looks positive. However, Nordea estimates much lower salmon prices due to a supply glut in 2018 which is perhaps the reason behind the low valuations for salmon producers.
Leroy Seafood Group (OTCPK: LYSFY)
Leroy Seafood is another Norwegian company but is a little less focused on salmon. The Group’s core business is the production of salmon and trout, catches of whitefish, processing, product development, marketing, and the sale and distribution of seafood. The price to earnings ratio is 7 so it seems like another interesting salmon investment.
Bakkafrost is a Faroese salmon farming company based in Glyvrar on the island of Eysturoy in the Faroe Islands. It’s another salmon producer with a low PE ratio and a nice dividend yield. The stock is cheap like the others because it is expected that 2018 growth in salmon supply will be 8% which has already lowered prices. Such cyclicality is normal in such an industry but if salmon is eaten more and more globally, the story could be great for these companies.
If you look for a company owned by insiders, Bakkafrost is the stock for you as insiders are the largest shareholders.
Austevoll Seafood (Leroy Seafood II)
Austevoll seafood is another Norwegian company. It owns 52% of Leroy Seafood Group, 49% of Br. Birkeland, another Norwegian salmon producer and fisher, and another 23 fishing vessels and 11 processing plants in Peru and Chile, and 50% of 25 processing plants in the North Atlantic. However, the main part of revenue comes from Leroy.
Tassal Tasmanian Salmon (ASX: TGR)
Tassal Group Limited is an Australian company listed on the Australian stock exchange. It has a PE ratio of 10 and a dividend yield of 4% while the stock price is close to 52-week lows. It trades close to book value, and has low debt. This looks like another cheap, stable salmon company.
Grieg Seafood & Salmar
There is no point in continuing to discuss more Norwegian salmon producers, so I’ll just mention Grieg Seafood and Salmar which have the same characteristics as the above mentioned companies. What’s interesting about Salmar is that it has invested 690 million NOK, or about $90 million, in offshore salmon farming and Ocean Farm 1 will be the world’s first offshore fish farm.
We can’t know how this will impact the future of the fishing industry as it is still a pilot project, but there will definitely be a disruption as prices and demand continue to rise. Nevertheless, it could take a lot of time for that to happen as the plants have to be built, tested, and then still it takes almost two years for a fish to reach commercial weight.
Given the importance fishing has in feeding the world, it’s interesting how few big players there are and how most are from Norway. We can expect growth and consolidation in the long term which makes industry exposure an interesting option.
The low valuations and global demand growth make the sector even more attractive and it might be that the few investing possibilities keep the sector as a whole off the radar of major global investors.