In order to find the best investments, I try and bring a myriad of elements to the decision making table. As a method of screening, I try to look for statistical relationships in a stock price that repetitively exhibit themselves on a yearly basis. This allows me to find companies with some sort of yearly pattern to their business cycle that I can potentially use to invest in the near future. By using statistics, I have searched the market for a good company which typically increases in price between now and the end of the year. This company is Hormel Foods Corporation (HRL). Below is a table summarizing the key numerical properties that initially drew me to this specific company.
In the above table, 22 years of stock market history are shown for HRL. This table is constructed by determining the performance of the company for the months of August through December of each year and calculating key figures about this performance. The first element that drew me in was the repetitive nature of HRL's gains. In the past 22 years, Hormel has increased in share price between August and December 95% of the time. Not only is this performance exemplary, but the magnitude of these regular increases is very high as well. In an average year in which HRL increases in share price, it does so in the range of 12% during the next five months of the year. This handsome return has repetitively happened between August and December for the past 22 years.
Statistics alone, however, are not a strong reason to invest. Many companies have statistical properties that are attractive, but if the underlying company is not robust, an investment in such a firm is simply playing the numbers and not attempting to invest in something of value. In order to compliment my statistical research, I believe that strong fundamental research is necessary. The method of fundamental research I prefer is to employ weighted-average cost of capital. WACC is essentially a figure that represents the combined yield required by stockholders and bondholders. If a firm is able to earn a return above their WACC, they are a strong and growing firm. Firms that are not able to meet their cost of capital represent an organization which is bound to be struggling. As can be seen in the table below, I have calculated the weighted-average cost of capital for HRL and compared it to two key return metrics.
In the above table, the strength of Hormel can be shown. In order to satisfy its equity and debt investors, Hormel must generate a 4.1% return in their business endeavors. This figure is based upon their capital structure and the market perception of company-specific risk. Hormel is strongly outperforming their required return in that they are earning a return on assets and return on equity significantly higher than their WACC. In fact, the return on equity within the company is over four times their required return for investors! Essentially this means that the firm is generating four times the return that their equity holders desire. With such a strong and robust return, Hormel shines as a company which is positioned to continue their performance.
It is important to note that Hormel is exposed to the price of meat and other food commodities. Since Hormel is a producer of processed products, fluctuations in commodity prices can lead to higher expenses. If an investor were to simply examine the agricultural drought and increase in related commodities, he doubtless would come to the conclusion that Hormel is bound to be affected. Many investors have come to this conclusion, causing Hormel to drop nearly 10% in the past month. However if an investor were to examine the company's financial statements, one would find that Hormel hedges the price risk associated with their volatile commodity inputs. This coupled with the fact that Hormel has achieved a compounded annual growth rate in operating profit of 11% for the past 5 years strongly points to a continuation of upward share price.
As a final input, I try to look at the technical picture. I have found that by incorporating many elements into my analysis, I am able to make a more informed investing decision and technical analysis is my final check before investing. In the below chart four years of history can be seen. Hormel has recently come out of a strong upward move in which it has doubled in price since the financial crisis lows. It is currently range-bound in that it is has been bouncing between $30 per share and $25 per share. The impact of the recent agricultural drought can be seen in the most recent chart data. I believe that somewhere in the near future the market will wake up to the strength of this company and continue its upwards swing in price, ending the year strong.
Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.