Seeking Alpha
Long only, deep value, special situations, small-cap
Profile| Send Message|
( followers)  

Before sprouting my latest Alpha, or should I say Alfalfa seed; below is a tabular update of the stocks I have recommended since becoming an SA contributor four months ago. With the exception of TGC Industries (NASDAQ:TGE), the original stories driving these stocks are still intact. TGE's short-term business outlook has dimmed, but the company is strong long-term.

Article

Article Date

Price

5/10 Closing Price

% Gain/Loss

Adams Energy (AE)

2/21

$38.09

$57.49

+49.9%

GenCorp (GY)

2/28

$11.66

$13.87

+18.9%

TGC Industries

4/8

$9. 34

$9.04

-3.2%

Homeowners Choice (HCI)

4/23

$24.75

$32.05

+29.5%

StealthGas (GASS)

4/25

$10.20

$10.46

+2.5%

Halcon Resources (HK)

5/4

$5.34

$6.10

+13.8%

Normally, I write about stocks I believe to be undervalued and whose true value has yet to be recognized by the market. Value stories are increasingly difficult to find in this market, so this is a very promising three to five year growth story about a small agricultural seed company in California's Central Valley that I believe will become a huge success.

Founded in 1980, S&W Seed (SANW) is a micro-cap company that breeds, grows, processes and sells alfalfa seeds, to distributors, dealers, farmers, and seed brokers in the western United States, Mexico, South America, Middle East, Africa, and other countries with Mediterranean climates. In addition to its agricultural acreage, it owns and operates a 40-acre seed cleaning and processing facility at its headquarters in Five Points, California. It recently started growing the Stevia plant which is the source of a relatively new, and increasingly popular natural, non-caloric food and beverage sweetener called Truvia.

As of Monday May 13th, SANW closed at $9.52 with a 52 week high of $11.40, and a low of $4.43.

Industry & Company Growth

If you didn't grow up in farm country, chances are the word alfalfa conjures up images of the off-key, cow-licked member of Our Gang, or what you feed to rabbits and guinea pigs, but alfalfa, (a.k.a. Hay) is the fourth most widely grown crop in the U.S., is valued at more than $13 billion a year; and a major source of livestock food. A fringe benefit of alfalfa production is honey from bees used for pollination, and which provide over $200 million dollars per year of added business to alfalfa producers.

Alfalfa demand depends primarily on the number of animals that eat forage, mainly cattle and pigs for meat consumption and cows for the dairy industry. Alfalfa is also consumed by horses, sheep and goats, as well as humans who eat the sprouts in salads, sandwiches and many Asian dishes.

Drought and low-levels of planted alfalfa acreage caused an alfalfa hay shortage in 2011 along with significant price increases. As a result, more farm land is being redirected to alfalfa growth and has increased the demand for SANW seeds. Overall, demand for alfalfa and alfalfa seed is increasing as our economy improves and as other countries' appetite for U.S. meat increases.

SANW also has redirected unused processing capacity at its seed processing plant to other seed producers that don't have their own plants and this has provided an earnings boost. The recent addition of Round-Up Ready alfalfa seeds to its inventory and the purchase of the international distributor of its seeds will increase earnings as well.

With all of that being said, the real catalyst behind the SANW growth story however, is not the increased demand for alfalfa, but what is becoming the explosive demand for Stevia plant whose leaves are used to make the all natural, no-calorie sweetener, Truvia. Truvia is quickly becoming the non-sugar sweetener of choice for major food and beverage manufactures such as Coca Cola and Pepsi, just to name two, and global Stevia demand is on the verge of skyrocketing! Truvia is a sweetener that has been researched thoroughly, and because it is made with all-natural Stevia, has been shown not to have the health concerns associated with artificial sweeteners like Aspartame and Saccharine. America's war on obesity dictates that consumption of sugarless sweeteners such as Truvia will only increase in coming years.

PureCircle is an England-based company and the world's leading producer of high- purity Stevia for the global food and beverage industry. SANW has a five-year contract to provide Stevia leaf to PureCircle and is quickly adding acreage to fulfill its contract obligations. SANW is working exclusively with Dr. Clinton Shock, world renowned expert on Stevia, and he has engineered plants that grow waist high, compared to previous plants that only grow about knee high. These plants are being called "Monster" plants and have twice the leaf mass, and contain much higher concentrations of the active ingredient used to produce Truvia than previous plants.

Valuation Metrics

SANW's projected EPS are $0.10 for its 2013 fiscal year which ends June 30th, $0.26 in 2014, and $0.43 in 2015. At Friday's closing price of $9.48, SANW is trading at 36x 2014 projected EPS, which is well above the 16.3 industry average. Revenue growth for 2012 was up 87.5% over 2011 vs. the 5% industry average, and LTG is expected to exceed 25% per year. Book value is $3.40 per share.

Other Factors & Conclusion

While there are some other players in the U.S. Stevia plant growth market, Stevia Nutra Corporation, (OTCPK:STNT) and Stevia First Corporation, (OTCQB:STVF), both are penny stocks that trade OTC. At present, SANW seems to be far ahead of any serious domestic competition. Mainstream analyst sentiment for SANW is mixed with four firms flashing "Buy" signals and target prices of $14-$15; others are recommending "Hold to Sell" after the big price run-up from the mid $4's.

SANW reported on Monday May, 13th. Read the press release and the SA transcripts of the conference call, and develop your own conclusions. That being said, as with any stock, there is the risk of capital loss, so conduct your own research and speak with your investment advisor about SANW.

Source: S&W Seed: The Sweet Taste Of Alpha