Food Stocks Bite the Dust

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 |  Includes: BRID, CAG, CKR, GAP, HSH, IPSU, PBY, SVU, SWY, TSN
by: Mark Krieger

Whoever proclaimed food stocks were safer than other companies might want to get his or her head examined. The logic of the argument made perfect sense - everybody has to eat and when the economy is in an up cycle, these so called "defensive stocks" theoretically should produce lower returns than their counterparts. These types of equities are supposed to offer lower risk, therefore they should also produce less reward.

Wrong. These food stocks have literally shafted their owners , as they achieved lower returns during the good times and larger losses in the bad times. Go figure. Sorry about my ranting, I guess I just needed to get some of this disappointment off my chest, as a form of therapy to cope with my losses.

This last week of trading, the DJIA fell about 6% while my Basic Food Fund index dropped at almost twice the rate, from $114.50 to 103.14 or 10%. What’s that all about? The index now is precariously close to penetrating the all important psychological $100 level. The good news is, the carnage has gotten so out of hand that dividend yields have risen considerably.

Meaty dividend yields: Nine of the fourteen components of the “BFF” pay a cash dividend. It is surprising to note that even though SCS recently cut its dividend in half, the stock still yields a juicy 8.2% return, second only to PBY’s current 8.9% payout. The balance of BFF’s dividend yields are: SLE; 6.2%, IPSU: 5.2%, CAG: 5.1%, SVU: 4.8%, CKR: 4.1%, TSN: 2%, and SWY: 1.8%. All the company’s earnings are sufficient enough to cover their dividend payouts except PBY and TSN.

Low valuations based on earnings and book value: Every single component but CAG and CKR are selling at book value or at a discount to book. The index contains an average multiple of about 10 times 2009 earnings estimates, excluding PBY, GAP and SFD who are expected to post losses. From these beaten down prices, it would be logical to assume all the bad news and then some has already been beaten into these companies. The market is irrational and typically overreacts in extreme measures. When cooler heads prevail, these valuations should respond accordingly.

Zero debt is king: They say cash is king, but having no debt on your balance sheet is also regal-like. It gives companies the option to raise cash through borrowing if an attractive opportunity presents itself (bankers always want to lend to those who do not need it) and the freedom from the nagging bite of the interest expense associated with debt service. The BFF components free of debt are: BRID, IPSU,and WINN.

Bottom line: It’s been hard to stomach the effects of a portfolio in free fall status. I am tempted to buy more, but the famous line, “don’t throw good money after bad”, keeps pounding in my head. I thought these companies were good bargains at twice the price, but the market has the tendency to humble you real quick. I really thought I could outsmart the market, yet instead the market has picked my pocket and is laughing hysterically at me and all the other suckers out there who thought they had the world by the tail.

I realize the market will probably continue to ratchet down with occasional blips to the upside, but a pattern of lower lows and lower highs will likely prevail. A trip down to a 5000 Dow could transform into a bull trap –There are many at that point, who would rush in, thinking a bottom has been reached, only to be met by a further demise, as longs use the temporary spike as a selling opportunity and shorts sell to open additional positions. The point is, buyers at the 5000 level could see the rug pulled out from under them.

Could 2000 be the bottom? I have no clue, and more than likely, none of us really know where this damn thing is heading. What can we do about this? (1) Go short on high PE stocks (I realize there are few left-but try anyway). (2) Buy gold. (3) Buy high relative strength stocks - try for stocks paying a nice dividend. (4) Sit back and relax, and when the market and economy finally begin to recover, go full speed ahead and bet the farm, because the huge amount of cash sitting on the sidelines will act akin to the release of a giant coiled spring, unleashing an unprecedented amount of energy to feed the upside.