Do food stocks offer a margin of safety?
Before discussing food stocks as investing opportunities, let me just tell you why I am researching the sector at the moment (March 2019).
I like to invest in sectors that offer businesses with a margin of safety. This means that:
On the other hand, you have also very interesting sectors like Software as a service that are bound to grow, but I have no idea which provider will be a winner and whether it has a moat strong enough to insure long term profitability. If we look at the price to sales ratios of such tech stocks, we can see that there is a long way to go before those become profitable.
Source: Justin Swierczek
The main difference between the two investing approaches is the approach to risk. With a margin of safety, you try to limit your downside but you also limit your upside on a specific stock. However, you are not necessarily limiting your total portfolio return. Buying stocks with price to sales above 10, implies a big potential for a total loss while buying food stocks limits the downside in many cases. Therefore, I am researching the food sector with the hope that I find something interesting to follow and maybe buy.
I always like to go through long lists when researching a sector. Looking at each individual company gives me a good comprehension of what is going on in the sector.
Just from a quick look at some food stocks traded on the NYSE shown in the above list, I have concluded the following:
So, what are the tailwinds in the food sector?
I don’t know why, but I am not fully convinced about the above tailwinds. I look at food prices, and see them mostly go down.
The keys here are technology and investments. Each country subsidizes food production, which leads to heavy investments and overproduction. Further, improvements in technology, GMO etc. leads to more production that leads to lower prices, especially if there is nice global weather as we have had the last few years.
So, again value investing comes in handy here. You have to look for an investment where, you win big if food prices increase, but you still win if food prices stay low for the next 10 years.
Also, something tricky when it comes to food prices is ethanol and biodiesel. Politicians can simply say we will have to use other forms of energy, or oil prices can stay low, and a big part of demand for food would vanish.
On the other hand, there are many different trends in the food industry that we cannot put them all under one hat and call them food. There are organics, ingredients, flavours, spices, processed foods, private labels etc.
BG is a food trader and processor, grains, soy, corn with some other adjacent businesses.
Many are waiting for a stock market crash to buy things on the cheap. Well, you have one here.
Source: BG Stock Price 5-year chart
The business is 200 years old and has been constantly rewarding investors. Over the last 10 years, 50% of the current market capitalization has been returned to investors.
Source: Bunge IR
They business model is focused on increased volumes in food trade and processing.
Source: Bunge IR
We have seen volatile food prices in the past, consequently BG’s cash flows have also been volatile.
Source: BG’s cash flow statement – Morningstar
On top of everything, there have been rumors that Glencore or Archer Daniels will acquire BG. As these things take time, perhaps it will push the stock price up in the short term but I still have to research it in depth and compare to other opportunities like the already mentioned ADM, Wilmar and some others food businesses traded around the world.
To conclude on investing is food, it all boils down, like in most cases, to the specific business, the quality of the management, the moat, the cash flows, the growth, risk and of course, the price you pay. So, there is no point in discussing what will happen, will we eat more of this or that, the focus has to be on the businesses and I am going to analyse a few businesses for you, to give you an indication of what can be found and what are the dangers.
BG is a completely different investment now at $50, then it was at $90. So, let’s continue looking at businesses and focus less on things we cannot know and forecast.