by Tim Melvin | April 30, 2014 2:31 pm
I have heard several commentators and pundits recently talk about loading up on the consumer staples stocks. The rationale is the same as it has been my entire career. No matter what happens with Ukraine or tapering programs, people still have to eat, drink, clean their house and take a bath. Investing in the companies that make these products should do very well no matter what the economy does.
It sounds perfect on paper but has never really worked in real life. When markets go south, everyone goes along for the ride, especially those stocks that are widely held and overly influenced by panicky retail investors. They tend to gravitate towards names they know and those include a lot of the so-called staple stocks.
I looked at consumer staples through several lenses, looking for any signs of bargain issues. My first thought was that these companies can generate cash flows that are more stable than most and might be attractive to private equity types looking for long term returns. While consumer staples are indeed usually a favorite target of PE funds, I could find no stocks that traded at valuations that would attract astute private equity buyout investors.
Industry leaders like Procter and Gamble (PG) and Colgate Palmolive (CL) trade at EV/Ebitda ratios that are even above the current sky-high 11 times average deal multiple. My more successful PE friends and associates tell me that they like to buy at ratios less than 5, and not one company in the consumer staples sector trades at that level or lower.
Next, I broke out my ordinary old value investor shat and looked for stocks that provided staples and traded for less than their underlying asset values. And even then, only one company makes the grade when we use this valuation lens to look at the sector.
Seneca Foods (SENEA) is an old favorite of mine. The company makes canned, frozen, and bottled produce and snack chips and sells them under several brand names and private labels. It also packs Green Giant, Le Sueur, and other brands of canned vegetables, as well as select Green Giant frozen vegetables under a long-term agreement. The stock is currently trading at just 82% of book value, so it is a bargain issue based on asset value.
I decided I would try one last screen to find some stocks in the sector cheap enough for serious consideration by long-term investors with a value bent. I used the less stringent Graham number calculation that includes earnings as well as asset values to calculate value. I ran a simple screen to look for stocks that traded at 75% of less on this estimate of corporate value. Only Seneca passed, as the stock trades at just 67% of the Graham number value of the shares. Most of the sector trades at a multiple of the Graham derived value rather than a fraction, which is the idea.
The consumer staples thought thick and thin meme is a great story. But in the real world, it is just a story and with the exception of one stocks the sector is not cheap right now
As of this writing, Tim Melvin was long SENEA.
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