By Mark Bern, CPA CFA
I have four objectives in this article: (1) Explain briefly to readers where I have been for the past year and why; (2) Provide an outline of what I have planned for this series; (3) Provide a brief summary update on at least three companies from the original series bearing the name "The Dividend Investors' Guide to Successful Investing; and (4) Give readers a brief explanation of what I expect from the economy and stocks over the next three months.
Where have I been?
I needed three things that I could accomplish only by taking a sabbatical from writing. The first on those was to get better acquainted with social media and Internet marketing. For one who didn't use Twitter, Facebook, Google Plus, Flickr, YouTube, or any of the other popular social media network platforms, this was quite the awakening! It was also, at least to some extent, a means of sucking up my time that I should have spent elsewhere. But, in the end, I have learned a lot and anticipate leveraging this new knowledge in the future.
The second thing I needed was a break from and a new perspective for my writing. As it was before I stopped, I was churning out anywhere from five to ten articles per week including three distinct series with a couple more in the concept stage. I realized that I needed to combine all the concepts into one coherent series that reflects how I invest personally. Each previous series only explained one or two facets of what I do and I felt it was becoming far too complicated for some readers. That went against my primary goal of making seemingly complex strategies simple through detailed, step-by-step instructions. That should give you a hint about where this series is going.
The third, and arguably the most important need on my list, was to get a good handle on an answer to the big question: do I expect inflation or deflation. The answer holds a great deal of importance in determining how I should be investing for myself and what the basis should be for the guidance I provide in my writing. Without being confident in this assessment I didn't feel that I could, in good conscience, add adequate value to readers who desired guidance to get through both good times and bad. With that uncertainty hanging over me I just couldn't write with confidence. Of course, I could still be wrong but the process has provided me with a much better understanding of the underlying aspects of our economy during these uncharted times and I believe I will be better equipped to adjust my views accordingly as new information and events unfold.
First, I intend to provide updates and assessments of the previous installments to give readers (especially new ones) a sense of how well the stocks on my "Master List" have done since the original series of articles was published over a year ago. To get a better sense of what the original series was about and the rules that I apply in selecting stocks for my master list, please refer to the article that began it all.
Second, I want to provide a better, more comprehensive explanation of how invest according to the varying price levels of individual stocks on my list and the general economic environment. I like to buy and hold, but there is much, much more to my overall strategy as I will explain in future offerings in this series. This approach will combine all my previous series into one integrated series with an emphasis on increasing current income while maintaining a low risk profile. To this end, I intend to write one or two articles that explain what strategy I employ in each of the various situations and then get into the details of each strategy embedded in the focus articles on individual companies as the situations arise. I want this to be a series that readers/investors can understand and use rather than merely an instructional activity based upon theory. However, I always recommend that investors do their own due diligence and try things out on paper until they are comfortable that they understand each strategy, including the exit strategies and risks.
Third, I need to complete the original series by adding assessments on a few more industries that I didn't get to before my sabbatical. This will include some additional companies to the list, a brief summary for each one added and explanations on why other widely-held companies did not make the list.
Fourth, I will, once I have completed the updates and added the industries, begin writing focus articles on each of the companies on my list. I can't promise more than one update a year, but am currently planning on updating the focus articles semi-annually. We'll see how much time I can commit to this once I get past the completion of and updates to the original series.
Fifth, once the updates and additional industry assessments are complete (hopefully, before Christmas), I intend to publish an article summarizing the complete list, including any new additions or those eliminated. The series will include a quarterly summary update based upon this format.
Summary update on Food Processing companies
Three companies made my list in the original article Part II: McCormick (NYSE:MKC), Smuckers (NYSE:SJM), and Hormel (NYSE:HRL). We will start with MKC as I believe it to be the safest company in this industry.
McCormick stock was at $56.87 on 5/28/2012 when I wrote the original article; current price (all quotes in this article are as of October 4, 2013) is $64.66. That equates to a gain of $7.79 per share, or 13.7% so far. When I originally wrote about McCormick, I wrote that I felt that the stock price was about 8.5% above fair market value (FMV). The stock did not drop down to FMV, but those who bit the bullet have fared well enough gaining 16.6%, including dividends.
MKC continues to pay down debt from $1.03 billion at the end of 2011 to $779 million as of the end of 2012. I expect further reductions in coming years. The company also continues to reduce outstanding shares which also helps the bottom line.
The purchase of Wuhan Asia Pacific Condiments (WAPC), based in China, should also help add to growth going forward in a very favorable emerging market with excellent potential growth as the huge and expanding Chinese middle class becomes more willing to try new seasonings and flavors.
In summary, MKC continues to be one of my favorite companies to buy and hold for long term investors. Best of all, the stock price has dipped enough lately to bring the price back close to FMV. My new five-year price target for MKC is $87. Add the steadily rising dividend and the average annual return on investment (ROI) is about eight percent. Remember, the main reason I like this stock is the low risk. For more details please check out the original article linked above.
Smuckers makes more than just jam and has developed superior customer loyalty across many leading brands. Fiscal 2012 (ended April 30, 2013) saw strong volume growth in sales of peanut butter and coffee (Folgers), its largest division. The company also benefited by lowed inputs costs for peanuts and coffee beans. In addition, the company made significant investments in the future, especially in the supply chain management.
Unfortunately for those who did not buy the stock back in May, 2012, the price has already risen from $77.58 to the current level of $105.93; a gain to date of 36.5%. Growth will probably slow for the next year and more than 60% of my expected five-year has already been achieved. I am raising my five-year target from $125 to $130. This high quality stock will often trade at a premium to its peers, but right now it has gotten ahead of itself and I would recommend waiting for a healthy correction of ten percent or more before adding shares.
Patience could raise your average annual ROI from 6.3% to over 8.5%.
Hormel sported the best value of the three at the time of my original article back in May, 2012. The stock price was then at $30.15 and has shot up to a current $42.03 for a gain of 39.4% This stock has gotten a bit pricey also, in my opinion.
I expect mixed results from the companies various products due to variables in inputs. Beef is likely to rise in price due to continued liquidation of western U.S. herds which reduces future supply. I expect earnings growth to slow in fiscal 2013 due to increased input costs and pressure on margins. But 2014 should look better as feed grain cost should fall with an expected higher crop in 2013 taking the pressure off after a small crop in 2012.
I like the purchase of Skippy as this should help HRL gain ground in the Chinese market with a well-recognized brand. This should also add nicely to the top line in 2014 and help the bottom line more in the future as the acquisition is integrated.
However, my five year target has only risen from $52 to $54, even though the stock price has already risen by more than half of my original expected five-year gain. That works out to an ROI of only about 6.5% per year, including the dividend. Thus, I would wait for a correction of ten percent or more before entering this issue. This would raise the expected annual average ROI to over 9.5%.
As a group, if one had invested an equal dollar amount in each of the three stocks the gain from appreciation would be a tidy 29.9%. Don't expect to achieve that again too soon. The average dividends earned would add another 3.6% since May 2012, providing an average ROI thus far of 33.5% for the trio.
But keep in mind that two of the three are now well above my estimated FMV and we need to exercise patience if wanting to add shares of these three excellent companies. Good companies do not always mean good investments. Buying good companies at prices that represent good values translates into better investments.
Expectations for the next three months
It appears that the Fed is determined to keep interest rates low and continue the current quantitative easing (QE) going into year-end. As long as there are no change of plans and no other dramatic events to upset the applecart, such as major devastation from a natural disaster disrupting supply chains or significant geopolitical events that disrupt trade or cause a crisis, I expect that stocks, in general, will continue to churn higher once the US debt limit and budget fiascoes are behind us. As a matter of fact, I think that the market was in dire need of a breather and needed to consolidate. A look at the one year chart would suggest that this process has been underway since June.
Once politicians agree to something, no matter whether it makes sense or not, I expect stocks to rebound and move higher testing recent highs. Beyond that, the future begins to get murky as I cannot tell at this time when the Fed will begin to taper its QE program or by how much. Both of those answers will provide us with guidance as to what the market will do from there.
Before we hit a long-term high, unless we already have, I would expect more volatility on a day-to-day basis over an extended period of time. Watch for some large swings regularly of more than 150 points to illustrate when the market uncertainties begin to unravel investor confidence. Of course, one could also argue that it is the other way around. But history shows us that a significant rise in volatility is one of the indicators to be more cautious. Happy investing!
Disclosure: I am long MKC. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.