Stock up on food supplies
The Nasdaq composite has lost about 30% of its year-to-date gains. Some would view these gains as “ill-gotten” because the market should never have gone this high in the first place. After all, valuations were sky-high and the economy had major structural problems (inflation, excessive money printing, uncontrolled government spending, rising interest rates, etc.).
The stock market had to come back down to earth. It had simply gone too high, too fast and valuations were in the stratosphere. In the meantime, I bought QID as a hedging/insurance policy against my long positions. The good news is that food stocks are somewhat immune to future carnage. The three companies profiled in this article have all shown high relative strength lately and rallied at least 10% above their 52-week lows.
Why do I love food companies so much? People still have to eat. Plain and simple. Another bonus? inflation can also be beneficial for these companies. For example, suppose a beef jerky company’s meat costs are 30% of its sales and it sells a package for $1.00. A year later, that same amount of meat costs 10% more (now reaching 33% of sales). The company passes the entire increase on to its customers in the form of a 10% price hike – selling the same package of beef jerky now at $1.10. Last year the company earned 70 cents on this package, while this year (thanks to inflation) it earns 74 cents. That’s a gain of 5.70%. Translation? Inflation can be a good thing if it can be “fully” passed on.
Farmer Bros. (FARM): Deep, deep, discount. With a market cap of just $94 million, it sells for a mere 21% of its annual revenue and a 6% discount to its book value. Shares are already up 10% from their 52-week low of $4.51 and have started to show impressive relative strength.
Tim Stabosz, a major Seeking Alpha shareholder and contributor, has recently spearheaded the bullish case on the company and brings some rather compelling questions to the table.
Some of his bullish trepidation is offset by Seeking Alpha author Michael Doyle’s complete shredding of the company via his “Don’t Add to Farmer Bros” article. In an exchange of comments between Stabosz and Doyle, Stabosz raised the following point:
“This article is quite worn, with hardly any new perspective on the updated situation. 1) Management has become even more insistent on its ability to monetize assets, and it’s abundantly clear to me that there is a significant, if not massive, understatement of land and other heavy assets on the books, providing a unrecognized additional margin of safety. 2) The improvement in gross margin has indeed been very encouraging and will continue to improve, and 3) management has made it clear that there are still effects of both Covid (particularly in the quarter which has just been reported) and labor shortages, where hotels are not catering their breakfasts, for example, and of course, the same delayed catering of an office life apart whole, where there is clearly more revenue to recover. This business has scale and fixed costs, so a return of more sales will allow the business to return to profitability in the next fiscal year.
I agree that the lack of follow through on substantial internal purchases has been disappointing, and I would have liked to see slightly better numbers in the last quarter. As a result, I reduced my exposure here months ago. But all of that is discounted in the current stock price, looking back over the past two months, and I modestly added…and also traded around the position, because I agree with the author that “the street” is eager for the losses to stop here and does not want to give them credit until it happens. But that doesn’t mean the stock can’t go up to $6-7, for example. I agree with Krieger that the author has a mealy mouth trying to have it both ways. The right choice is either to lower the average (especially since he keeps reminding us how small his position is) or to sell. Staying put is more like the action (or inaction) of someone who doesn’t really understand what they have and who is frozen in fear of further loss. The article’s lack of substance, and providing only the most superficial makeover, seems to validate this.”
Price target: $9
Coffee Holding Co. (JVA): The company will release its second quarter results the week of June 13 and may have a positive surprise lurking. This company, devoid of any research coverage, is definitely under the radar. With a market capitalization of just $17 million, calling it a nanocap is a huge understatement.
Shares slowly began to stabilize, rising about 10% above their 52-week low. Measurements prove severe value status. The stock has a price-to-sales ratio of 0.26 (implying that each quarter the company generates enough sales to cover its entire market valuation). Additionally, JVA is currently selling at a 40% discount to book value ($5.01).
Regarding the upcoming second quarter earnings release: Sequential sales are expected to increase 5% to $17.50 million, while earnings on a sequential basis will increase 20% to 6 cents. On a “year over year” comparison, look for JVA sales to show a rapid 21% increase from $14.46 million to $17.50 million. As for net profit, it will be stable at 6 cents, due to higher freight and packaging material costs. One-time costs such as legal fees and stock option expenses will also affect net income.
Price target: $6
Bridgford Foods (BRID): The stock has been on a tear lately. Over the past six weeks, it is up nearly 25% from its low of $10.28.
On June 1, 2022, the company completed its Green Street estate sale. As a result, his bank account swelled exponentially.
Second Quarter Sequential Improvement Highlighted: From the company’s first to second quarters, progress was recorded. Although sales fell 6% from $64 million to $60 million and SG&A expenses increased 230 basis points (from 23% to 25.30%), there was a strong report. . The snack supplier was able to triple its revenue from 3 cents to 9 cents (an impressive gain of 200%). The reason? The company’s gross profit margin increased by 230 basis points, from 25.50% to 27.80%. The irony present? Changes in the company’s general and administrative expenses and gross profit margin were exactly the same (230 basis points).
Summary of the company’s second quarter: (1) sales increased 19.80% from $50,477,000 to $59,986,000 (2) earnings climbed 29 cents from a loss of 20 cents to a 9 cent gain (3) Gross profit margin jumped 680 basis points from 21% to 27.80% (4) General and administrative expenses fell 30 basis points from 25.60% to 25.30% (5) as a percentage of total sales, Dollar General’s revenue increased by 39% from 14.20% to 19.60% (6) cash position increased by $9 million (7) operating profit generated a positive improvement of $3.80 million from a loss of $2,311,000 to a gain of $1,504,000.
Other key metric highlights: The company’s price-to-sales ratio sits at 0.47 while its price-to-book ratio registers a mark of 1.55. The “price to book” ratio will change radically, after the filing of its third quarter results. This number could fall below the 1.00 figure, as a large one-time gain (sale of Green Street) of $40 million passes through the financial statements. It will represent the best net profit (by leaps and bounds) the company has ever produced in its history. As a result, equity will flourish.
Price target: $18
Food businesses offer a high degree of security and stability. The ones included in this article are all selling near multi-year lows and offer significant reward potential. All the bad news and some of it has already been incorporated into these actions. As a result, they all produce a compelling risk to reward outcome. In addition, their low market capitalizations make them vulnerable to merger and acquisition activity, such as a takeover attempt or a management-led privatization attempt. Having food stocks while using QID as a blanket will definitely help you sleep better at night.