Stocks are expensive right now.
Let me re-phrase that: Large-cap stocks are expensive right now.
According to John Hussman, head of the Hussman Investment Trust, the S&P 500 currently sells for about 24 times earnings based on 10-year average earnings. In his latest weekly letter, Hussman explains how he uses a cyclically adjusted measure of PE that incorporates inflation to reach his conclusion that the S&P 500 is overvalued.
According to his research, the only time that the broad market sold for 24 times earnings was in 1929, 2000, and 2008. I’ll let you draw your own conclusions about entering the broad stock market at such a valuation.
My point is: If we’re going to find value right now, it’s probably not going to be in large-cap stocks.
So I recently found a small-cap agriculture stock that’s selling at an extremely cheap valuation of just 11 times trailing earnings. That’s inexpensive during any period, let alone during a time when the broad stock market has rallied for over 20 months with barely a breather.
I’m not saying it’s time to bet against the broad market -- I wouldn't bet against a speeding train like this -- but if you’re not buying value now, then you’re not setting yourself up for success.
The company in question is a Mexican poultry producer by the name of Industrias Bachoco (NYSE:IBA).
It’s a $1.3 billion company, founded in 1953. It went public in 1997 and, as a matter of policy, has paid an annual dividend of about 20% of its net income every year except for in 2009.
Here’s an excerpt on the company’s dividend policy from its annual report for fiscal year 2002:
The Company has maintained as a general policy an annual dividend of 20% of last year’s net income. Even though the amount or opportunity of future dividends cannot be guaranteed, Bachoco expects to pay an annual dividend to the holders of outstanding shares equal to an amount of no more than approximately 20% of the net income of the previous year.
The company lost money in 2008, so it didn’t pay the dividend that year in accordance with its clearly stated policy. But this year it’s scheduled to pay a dividend of 2.9%. That’s on news that 2010 profits were up 10% year-over-year from 2009.
This company’s clear and straightforward dividend policy is great for shareholders. A reliable dividend also gives the stock some degree of defensiveness should the broad market get shellacked. In other words, investors who snap us shares of Bachoco now are heeding the sage advice of Hussman by not buying overvalued large cap stocks.
Bachoco is also in a somewhat defensive sector, being that it’s essentially an integrated poultry producer. Mexican citizens aren’t likely to stop eating chickens, or eggs, anytime soon.
Okay, so there’s one more reason to like this stock: There’s actually considerable potential upside for it, related to an ongoing investigation against American poultry companies being conducted by Mexican authorities at the behest of Bachoco.
Bachoco has accused American firms of dumping cheap chicken products on the Mexican market, in violation of NAFTA. I’m not sure how this dispute is going to play out, but in the worst-case scenario, it might turn out that Bachoco is wrong and there’s no funny business going on. In that event,the story will blow over.
That wouldn’t necessarily be a bad thing for Bachoco’s stock; it would probably be a non-event. But if some big news comes out of this story, Bachoco could stand to benefit in the Mexican markets it serves as a champion for the Mexican consumer – protecting the little-guy from cheap American poultry.
I think there’s plenty of upside for this stock, especially as commodity prices continue to rise – because this company has integrated production, and the ability to profit from rising food costs.
The dividend isn’t too shabby either.