Spurred by Thursday’s bid by leverage buyout firm Kohlberg Kravis Roberts & Co. for Del Monte Foods Co. we analyzed the Food Processing group to find stocks which might appeal to other buyout investors.
We used a combination of our ratings from Chaikin Power Tools, the beta version of our soon-to-be-released iPhone app for individual investors and the excellent stock screening capability of Portfolio123’s web-based service.
Our rating is based on a 20 factor model incorporating Financial Metrics, Earnings Performance, Price/Volume activity and Expert Opinions to determine a stock’s potential over the next 3 – 6 months. Here are the results:
Over the past five years a buy and hold strategy which owned all 49 stocks in the Food Processing group would have returned 39.9% vs. – 5.5% for the S&P500 Index.
Investing in only those stocks with a bullish rating and rebalancing the portfolio monthly would have increased the return to 51.2%...better but just a starting point.
We then did a regression analysis to find stocks with similar characteristics to Del Monte Foods.
The following four factors stand out as profitable filters in this industry group:
Price to Sales Ratio < 1
Price to Book Value < 2.6
Debt to Equity Ratio < 1
Insider Buying (latest quarter) > Industry Median
We then took all stocks with a bullish rating in the Food Processing group, applied these four filters and the results were outstanding. Buying Food Processing stocks over the past 5 years with a market capitalization > $250 million and a price > $3 and rebalancing that portfolio monthly produced a return of 131.7% vs. a loss of -5.5% in the S&P500.
While past performance is no guarantee of future performance the following three stocks meet all of the above criteria, as did Del Monte Foods, and have a bullish rating.
Archer Daniels Midland (NYSE:ADM) 29.33
ADM has a very bullish rating reflecting strong Financial Metrics, Earnings Performance and Expert Opinions. The only fly in the ointment is very weak price/volume activity subsequent to their report on November 2nd of disappointing quarterly earnings. With a Price to Sales ratio of 0.31, Price to Book ratio of 1.22 and a Debt to Equity ratio of 0.44 Archer Daniels has similar Financial Metrics to Del Monte.
Corn Products International (CPO) 44.90
Corn Products has a very bullish rating reflecting strong Financial Metrics, Earnings Performance and Expert Opinions and very bullish Price/Volume activity. CPO has a Price to Sales ratio of 0.92, Price to Book ratio of 1.79 and a Debt to Equity ratio of 0.92. Corn Products has similar Financial Metrics to Del Monte.
Tyson Foods A (NYSE:TSN) 16.27
Tyson Foods also has a very bullish rating reflecting very strong Financial Metrics, a strong Earnings Performance component, bullish Expert Opinions but weak Price/Volume activity. TSN has a Price to Sales ratio of 0.22, Price to Book ratio of 1.19 and a Debt to Equity ratio of 0.51. Tyson’s also has similar Financial Metrics to Del Monte.
All three of these companies deserve a closer look as they would benefit from further buyout interest in the Food Processing industry.
Disclosure: Neither Marc Chaikin nor anyone at Chaikin Stock Research LLC has any position or interest in the aforementioned companies.