Seeking Alpha
Contrarian, macro
Profile| Send Message|
( followers)  

We are fast approaching the seasonal period when investors are told to "sell in May and go away." This is due to traditional seasonal underperformance from May until September. However, this mantra isn't always accurate. So what do you do if you are concerned about the seasonality, or concerned that the rally is getting "long in the tooth," but you don't want to miss more gains due to constant Fed easing?

You could simply look to companies with solid fundamentals and low betas. A low beta stock means that it is less volatile than the market as a whole.

Archer Daniels Midland (NYSE:ADM) is one such stock. It has a beta of .48, which means that it is approximately half as volatile as the market. Additionally, the company has solid fundamentals and is a play on a long term economic trend. If you MUST stay in the market for the "sell in May and go away" period, you may want to look at this stock.

ADM is a global producer and distributor of food and feed ingredients. It also processes a wide range of commodities, and has a large Corn Processing division that uses the crop to produce a variety of food and energy products. This division makes it the nation's largest producer of corn-based biofuel.

"Fundies"

ADM is in good financial condition and is not overvalued. Based on next year's earnings expectations, the company has a forward P/E of only 11. Its PEG is 1.59, which isn't necessarily cheap, but that is using estimated annual earnings growth of 10% and I think that growth figure is a bit low. Nevertheless, 1.59 PEG for a low beta, large market cap stock is very reasonable.

The company has moderate long term debt, and sports a debt-to-equity ratio of .34. Additionally, its price to book ratio is only 1.15, which is attractive.

It pays out a solid dividend of 2.31% and has paid quarterly dividends for decades. Dividends can help offset stock declines in market downturns.

Finally, its stock has a beta of .48, which means that the stock is far less volatile than the market as a whole. If there is a "Summer Swoon," like there has been the past 3 years, this stock should remain more stable than the average stock.

Metric ADM
Forward P/E 11.03
PEG 1.59
Price to Book 1.15
LT Debt to Equity .34
Annual EPS growth (next 5 yrs) 10%
Div. Yield 2.31
BETA .48

Long Term Increased Demand for Food Products

ADM remains a major beneficiary of the growing population and economic advances of the human population. As the population increases and as more people enter a middle class in emerging markets, they demand more food. ADM is a major seller of products that benefit from this trend. Its biofuel division also benefits from increased fuel costs.

Risks

Potential risks to the stock price are that the deal for Australia-based Graincorp goes through successfully, either with the current bid or a higher one. While this is probably a good long term strategic acquisition, the acquiring stock price frequently gets punished in the short term on acquisitions.

Another risk is that last years drought affects corn supplies this year, sending corn prices back up to all-time highs. This affects ADM's ethanol prices, making it less competitive, and could result in lower earnings.

Finally, Archer Daniels Midland is a major beneficiary of government subsidies to the commodities industry. According to one study, 43% of their revenue comes from commodities that are heavily subsidized by the government. Because of the continued concerns about the U.S. budget, the potential for significant cuts to subsidies becomes an ever greater possibility. This would significantly hurt farmers and ADM revenues.

Chart

The chart below looks quite strong. The trend is upward, with the price above the Ichimoku cloud and the Tenkan and Kijun indicators (red and blue lines). When price is above all of these, the trend is strongly upward.


(Click to enlarge)

Investment Ideas

Obviously, just owning the stock is one option and the fact that it has a dividend and low beta should help in the event of a market decline.

But if you are more worried about a significant market decline that even a low beta stock can't withstand, and if you are savvy with options, you can buy the stock and sell ADM calls with a May expiration that are about 5-10% out of the money and either: a) pocket the money, or b) buy ADM puts with it (ie. collar it).

The company competes against Bunge Limited (NYSE:BG), ConAgra (NYSE:CAG), and Ingredion Incorporated (NYSE:INGR).

Disclaimer: We do not know your personal financial situation, so the information contained in this article represents an opinion, and should not be construed as personalized investment advice. Past performance is no guarantee of future results. Do your own research on individual issues.

Source: Archer Daniels Midland: A Low Volatility Stock With Growth Potential