With a market cap of almost $20 billion, Archer-Daniels-Midland Company (NYSE:ADM) is the largest farm products corporation in the world. But largely due to the crash in commodity prices, the company's stock has fallen nearly 30% over the past year making the current valuation look down right cheap. Now trading at only 10 times earnings and 1.06 times book value, I can't think of a more defensive stock going into this scary season of market volatility and uncertainty.
With corn and grain prices having fallen so far and pulling the stock down with it, it looks like there is no where to go but up for ADM. When a company trades at book value, the market is not giving any value to all of the business's activities because the value being placed on it by the market is equal to the firm's tangible assets like real estate, cash, and equipment. This means that even if the company were to somehow go bankrupt, investors could be paid off buy the company harvesting its assets because they would cover all of the outstanding shares that exist. In other words, it makes the stock extremely low risk.
The famous Benjamin Graham who mentored Warren Buffett used book value as his number one proxy when looking for conservative investments because he was basically traumatized by the great depression and realized that sometimes the best way to seek upside is to look for businesses that have virtually no downside and let time take care of the rest. For the intelligent investors seeking safety of principle and an adequate return, as Graham looked at it, this is a no lose strategy that is particularly suitable for the current market environment of high uncertainty and the potential for further declines in the overall market.
ADM sells products whose demand will continue no matter what happens to the macro economy because human beings need to eat. And with commodity prices having fallen so far over the past year, any increase will likely lead to upside for the stock as well so there are many reasons to like ADM at current prices. The dividend has been raised every year for the past 40 years so there is no reason to believe that it will not continue to be raised for the next 40. With a current yield of 3.36%, investors get cash flow and a rock solid balance sheet in a company trading at a very low valuation.
With the average P/E in the market still close to 20 even after the worst start to a year in stock market history, ADM is trading at a 50% discount to the market despite the fact that it is a $20 billion company that is the largest supplier of farm products in the entire world. When you put all of the above together what you are left with is a very low risk stock that pays you wait for the inevitable upside that will occur whenever commodity prices start to rise or the economy improves or both. For the patient investor looking to preserve capital, there isn't much out there better than that right now.
Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.
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.