Monday was a brutal day for meat producers. While the Dow fell about 2%, Tyson (TSN) was hit eight times as bad, losing more than 17% on no news, while Smithfield Foods (SFD) stumbled 13%. Conventional wisdom dictates food processors normally should be safe havens and defensive in nature, because we all must continue to eat, but yesterday's action confirms just how much lunacy is dominating the markets.
Positive news released: SFD issued a press release indicating its North Carolina plant settled a union lawsuit while. This would seem like relatively good news, but the market obviously ignored it., punishing the shares in a horrific fashion. Within the protein segment, Pilgrim's Pride (PPC) stated it was successful in obtaining a credit waiver extending its credit line through the end of November. The company stressed its lenders are encouraged by the fact that its cost structure has substantially improved, as feed grain prices have recently dropped more than 50%. The largest chicken producer is also seeing the benefit of capacity cuts in the industry, as egg set data suggest. The prospect of lower input costs and higher selling prices enables PPC to take advantage of a recent $1.1 billion benefit, versus its more dire position just three months ago.
The numbers: TSN's forward multiple of 8 times 2009 earnings estimates of $1.05 is historically low. The company recently completed a secondary offering and as a result, has adequate liquidity. SFD is selling at an even more ludicrous forward PE of 6 times 2009 estimates of $1.77. The largest pork producer recently closed the sale of its beef operations to Brazilian beef giant JBS, for $565 million cash, so it too, has sufficient liquidity flexibility in the near term. Both companies share prices are substantially below their book values: SFD's Book value is $20 and TSN's book value prints out at $11.
Confirmation of insider purchases: SFD insiders have acquired 178,000 shares the past six months while TSN's insiders have been even more aggressive. Don Tyson purchased a whopping 4.6 million shares in conjunction with TSN's recent equity offering
Buy when there is blood in the streets: Easier said than done, but a mandatory calling for successful traders. Back up the truck on both TSN and SFD, and keep coming back for more. Someone else's loss will no doubt, end up being your gain, as the stock market is a zero sum game and for every winner there is a loser. This brutal selling is not a function of company fundamentals, but rather the product of panic selling caused my fund redemption requests and excessive fear. This relentless selling feeds on itself as everybody tries to hit the exits at the same time. This kind of buying opportunity only comes around, once! Once every 100 years, that is, so exploit it to its fullest.
Disclosure: Long SFD and TSN, and no postiion in PPC.