By Jay Peroni
I am always on the hunt for "forever" stocks.
These are stocks that can weather the storm and grow even during the market's darkest days. In fact, StreetAuthority co-founder Paul Tracy has built a very successful portfolio using this strategy.
It's easy to find stocks that can capture the upside of a rising bull market, but what happens when we hit the next financial downturn? How do you find stocks that can not only weather the storm but also actually make you money while the economy falls apart?
For many investors, 2008 was a year that will not be forgotten. Between Oct. 9, 2007, and March 5, 2009, the Dow Jones industrial average lost more than half its value. Not only were the financial markets collapsing, but scandals were rampant, and consumer trust hit all-time lows. It truly was a time of panic.
Look how far the markets fell in 2008 and 2009:
Yet a well-known food company was up 42% between 2007 and 2010 while the stock market plummeted. With seven category-leading brands in the United States and eight in Canada, this "forever" stock clearly bucked the trend. How could one company experience such a good fate while others suffered?
It starts with its recession-proof product lineup, which consists of food staples such as coffee, peanut butter and jelly. It not only sells high-demand products, it owns the lion's share of the market, with more than 30% market share for coffee and more than 40% market share for fruit spreads and peanut butter in the United States.
You know the brands: From Folgers and Dunkin' Donuts coffee to Smucker's fruit spreads, Jif peanut butter and Pillsbury cake mixes, this company has a substantial presence in grocery stores around the world.
The company I'm talking about is The J.M. Smucker Co. (NYSE: SJM).
Here are a few more reasons I love this stock:
- Strong market share: Smucker's leading coffee brands give it the position to keep its products at the top of retailers' lists and the negotiating power to keep healthy profit margins.
- Improved outlook: As the employment rate drops and consumer confidence increases, this should lead to increased trading. Consumers should flock back to name brands, which will help Smucker's volume, pricing and profits.
- Strong growth: Smucker has transformed its business through acquisitions and will seek to continue to increase profitability while boosting its dividend.
Take a look at the stock's performance since 2008:
Smucker generates plenty of cash flow. The price-to-free cash flow ratio is 23.1, which shows a strong ability to generate. Its target dividend payout rate of 40% of earnings is its big way of rewarding shareholders. The 2% dividend yield has maintained an 8.5% growth rate, increasing each year since 2001. Revenue has increased more than 14% from 2011 to $5.5 billion in 2012 and is projected to approach $6 billion this year.
The company's earnings have been quite impressive. During the past four quarters, Smucker has reported three positive earnings surprises and one in-line report. Earnings per share dropped 1.6% between 2011 and last year to $4.73 due to acquisition costs, but this year appears to be heading in the right direction with a projected $5.24 per share.
Smucker also shines compared with its peers in the packaged foods industry. Not only is the company's trailing 12-month price-to-earnings ratio of 20.9 lower than the industry average of 23.45, but its revenue growth of 10.4% is much better than the 6.1% industry average. Smucker's gross margins are 32.8% versus the industry's 30.4%, and its net margins are more than double the industry average (9.8% versus 4.3%).
Smucker is in great financial health, with a debt-to-capital ratio of just under 0.3. Despite its aggressive acquisition strategy, its leverage remains below most of its industry peers. It typically uses debt to finance its acquisitions, but its strong cash flows allow it to quickly pay down this debt.
Risks to consider: Commodity prices remain extremely volatile, posing a threat to future expenses. Smucker has had some challenges integrating acquisitions into its core business model, which could also weigh on future growth.
Smucker closed at $99 a share April 10, and remains a good buy at up to $102. My 12- to 18-month price target is $120, representing a 20% rise from its current price. With a current dividend yield of 2%, this stock provides a great combination of growth and income.