Stock Up On Food Stocks

The Nasdaq composite has lost about 30% of its gains since the beginning of the year. Some would consider those gains “ill gotten”, as the market should have never gone that high in the first place. After all, valuations were dizzying and the economy had major structural issues (inflation, excessive money printing, out of control government spending, rising interest rates, etc.).

The stock market needed to come back down to earth. It had simply gone up too high, too fast and valuations were in the stratosphere. In the interim, I have bought QID as a hedge/insurance policy against my long positions. The good news is food stocks are somewhat insulated from future carnage. The three companies featured in this article have all exhibited high relative strength lately and rallied at least 10% above their 52-week lows.

Why do I love food companies so much? People always have to eat. Plain and simple. Another bonus? inflation can actually be beneficial to these companies too. For example, let’s say a beef jerky company’s meat costs are 30% of its sales and it sells a package for $1.00. A year later, that same amount of meat costs 10% more (now reaching 33% of sales). The company passes on that entire increase to its customers in the form of a 10% price hike – selling that same package of beef jerky now @ $1.10. Last year, the company earned 70 cents on that package, while this year (thanks to inflation) it earns 74 cents. That’s a 5.70% gain. Translation? Inflation can be a good thing if it can be “fully” passed on.

Farmer Bros. (FARM): Deep, deep, discount. Tallying a market cap of a mere $94 million, this one sells at a tiny 21% of its annual revenues and a 6% discount to book value. The shares have already rallied 10% from their 52 week low of $4.51 and have started exhibiting impressive relative strength.

Tim Stabosz, a large shareholder and Seeking Alpha contributor, has been spearheading the bullish case on the company recently and brings some rather compelling issues to the table.

Some of his feverish bullishness is offset by fellow Seeking Alpha author Michael Doyle’s complete shredding of the company via his article “Not adding to Farmer Bros”. In a back-and-forth comment exchange between Stabosz and Doyle, Stabosz brought up the following argument:

“This article is quite threadbare, with virtually no new insights on the updated situation. 1) Management has become even more emphatic of its ability to monetize assets, and it is perfectly clear to me that there is a sizable, if not massive, understatement of land and other heavy assets on the books, providing an additional, unaccounted for margin of safety. 2) Gross margin improvement has been very heartening indeed, and will continue to improve, and 3) management has been clear that there are still effects from both Covid (especially in the quarter just reported), and the labor shortage, where hotels are not restoring their breakfasts, for example, and of course, the same delayed restoration of a full-fledged office life, where there are clearly more revenues to be recovered. This business has scale, and it has fixed costs, such that a return of more sales will enable to company to return to profitability, next fiscal year.

I acknowledge the lack of follow on substantive inside buying has been disappointing, and I would have liked to have seen marginally better numbers in the most recent quarter. Accordingly, I reduced my exposure here months back. But that is all discounted for in the current stock price, with the pullback of the last couple months, and I have been modestly adding back…and trading around the position, as well, as I do agree with the author that “the Street” is eager to see the losses stop here, and not willing to give them any credit until that happens. But that doesn’t mean the stock can’t trade back up to $6-7, for example. I agree with Krieger that the author is mealy-mouthed in trying to have it both ways. The right choice is to either average down (especially since he keeps reminding us how small his position is), or sell out. Staying put seems like more of the action (or lack of action) of someone who doesn’t really understand what he owns, and is frozen by fear of more losses. The lack of substance in the article, and providing only the most superficial re-look, seems to validate that”.

Price target: $9

Coffee Holding Co. (JVA): The company will be reporting its second quarter results the week of June 13th and could have a positive surprise lurking. This company, devoid of any research coverage, is definitely under the radar. With a market cap of a scant $17 million, calling it a nanocap is a huge understatement.

The shares have slowly begun to stabilize, rising about 10% above its 52 week low. The metrics prove severe value status. The stock holds a “price to sales” ratio of .26 (implying that each quarter the company produces enough sales to cover its entire market valuation). In addition, JVA currently sells at a 40% discount to book value ($5.01).

Regarding upcoming second quarter earnings release: Sequential sales should rise 5% to $17.50 million, while earnings on a sequential basis, will jump 20% to 6 cents. On a “year over year” comparison, look for JVA’s sales to show a spry 21% increase from $14.46 million to $17.50 million. As for net income, that will be flat at 6 cents, due to higher costs in both freight and packaging materials. Nonrecurring charges such as legal fees and stock option expenses also will dent the bottom line.

Price target: $6

Bridgford Foods (BRID): the stock has been on a tear lately. In the last six weeks, it has rallied nearly 25% from its low of $10.28.

On June 1st, 2022 the company closed on its Green Street real estate sale. As a consequence, its bank account swelled exponentially.

Second quarter sequential improvement evidenced: From the company’s first quarter to its second quarter, advancement was tallied. Although sales fell 6% from $64 million to $60 million and SG&A expenses ratcheted up 230 basis points (from 23% to 25.30%), a solid report was memorialized. The snack food purveyor was able to triple its earnings from 3 cents to 9 cents (an impressive 200% gain). The reason? The company’s gross profit margin blossomed 230 basis points from 25.50% to 27.80%. The irony present? Both the company’s SG&A and gross profit margin changes were by the exact same number (230 basis points).

Summary of the company’s second quarter: (1) sales rose 19.80% from $50,477,000 to $59,986,000 (2) earnings climbed 29 cents from a loss of 20 cents to a gain of 9 cents (3) Gross profit margin jumped 680 basis points from 21% to 27.80% (4) SG&A expenses fell 30 basis points from 25.60% to 25.30% (5) as a percentage of total sales, revenues from Dollar General climbed 39% from 14.20% to 19.60% (6) cash position rose $9 million (7) operating income generated a positive $3.80 million improvement from a loss of $2,311,000 to a gain of $1,504,000.

Other key metric highlights: The company’s “price to sales” ratio sits at .47 while its “price to book” ratio registers a 1.55 mark. The “price to book” ratio will change in a radical fashion, after its third quarter results are filed. That number could drop below the 1.00 figure, as a large nonrecurring gain (Green Street sale) of $40 million flows through the financials. It will represent the best net earnings (by leaps and bounds) the company has ever produced in its history. As a result, shareholders’ equity will blossom.

Price target: $18

Summary

Food companies offer a high degree of safety and stability. The ones included in this article are all selling near multiyear lows and offer big reward potential. All the bad news and then some have already been baked into these stocks. As a consequence, they all produce a compelling risk to reward outcome. In addition, their low market caps make them vulnerable to merger and acquisition activity, such as a buyout attempt or management led effort to take private. Owning food stocks while utilizing QID as a hedge will definitely help you sleep better at night.