Basic Food Fund: Fat and Happy for Now

by: Mark Krieger

To say the food sector has been on a tear lately is an understatement; more accurately it has simply “gone orbital”. The “BFF” index (comprised of 11 food and 3 nonfood stocks) has gained an impressive 9.4% the last three weeks from $128.39 to $140.47 compared to the DJIA’s rise of 7.7%, which is significant because usually food / defensive stocks have a beta much lower than the overall market, and are expected to react less to market forces than higher beta stocks. Many have inquired why the “BFF” includes non food entities (notably JBLU, SCS and PBY) and to be honest, these three issues evolved into the Fund because they were already big pieces of my holdings (unfortunately margined to the hilt) and out of desperation to track my portfolio, they were included . Sorry for the confusion, but sooner than later they should be replaced by “real” food stocks.

Component update

BRID: The snack makers’ average daily trading volume has recently picked up, as well its volatility - its shares have bounced in extreme ranges (last week it traded as low as $3.50 and as high as $5 on the same trading day). The Orange County Register featured BRID in an flattering article last Friday, which should help them pop up on value player’s radar screens. Although the shares have rebounded nicely from their lows, they still offer plenty of low hanging fruit to be stripped from the tree for those seeking rapid and sizeable appreciation, with minimal risk.

SFD: Two analysts cut their view on the shares; BB&T Capital Markets expects SFD to lose 50% more than it previously planned (from a fourth quarter 30 cent loss to a 45 cent loss) while Stephens Inc. increased its loss estimate from 40 to 48 cents . Stephens is worried that SFD could soon violate debt covenants , but the company responded vigorously, by stressing “it has sufficient headroom to remain in compliance with all its covenants”. The bottom line, low expectations can sometimes be beneficial, as a lower bar, makes it easier to jump over. Why do you think smart companies have the tendency to under promise?

WINN: The grocery chain has been steadily moving up. The Motley Fool just ran a piece on it, calling it one of the most outrageously cheap stocks based on strong balance sheet, safety of its sector and an Enterprise Value/ EBITDA ratio of less than 6. No wonder the stock has been on a roll.

GAP: The regional grocery retailer received positive research coverage when Kevin Dann started covering the company with a buy rating and a price target of $7. It is certainly surprising Dann offered such a chintzy price target, especially since the shares have already eclipsed it. The Company will be reporting fourth quarter results the first week of May with analysts pegging them producing a 25 cent loss on revenues of $2.32 billion. GAP is way past due to beat expectations and this could be the quarter it finally does so.

IPSU: Port Wentworth’s rebuild is right on schedule. The sugar company announced it will begin producing granulated bulk sugar by the end of May and will see the complete restoration of its packaging capabilities by fall. IPSU has received insurance advances of $160 million to date, which ironically amounts to almost twice the company’s total market cap.

SVU: This Thursday, the grocery chain operator is expected to report fourth quarter earnings of 80 cents on revenues of $10.86 billion. The company is in position to soundly beat these fairly low estimates due to the benefit of lower fuel costs, supplier concessions and softening food commodity costs.

Sucker rally or the real thing?

The overall market may have gotten ahead of itself lately. Much of the rally could be attributed to short covering and trading activity rather than investors accumulating positions. Although the market tends to looks six to eight months ahead, the overall economy is still weak and the market never should have been bounced as much it has in the first place. While the chances of retesting lows again are growing dimmer, a 50% retracement of the recent rally to the 7200-7300 (a 10% drop) vicinity seems more probable, and would produce another decent buying opportunity. Food stocks which typically carry lower betas will likely see less of a selloff, but don’t get lulled in to a sense of complacency that comes with being “fat and happy,” because what the market gives, it can take away!

Disclosure: Long all ticker symbols cited, other “BFF” index components include CAG, SLE, TSN, CKR and SWY.

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