Sunday, March 19, 2017

Upcoming purchase: GIS HRL

The stock market has had an incredible run. This has helped the paper value of my assets, however it makes buying stocks very difficult.  At this point I've resorted to finding stocks that have not experienced the recent run up. Or if I want to purchase companies that have run up, I will buy the ones that have the highest growth potential (slow growing companies with high P/Es just doesn't make too much sense).

I really like the food consumer staples sector. It is defensive and the products still sell during recessionary times. Right now I have $6600 ready to allocate to this sector. I will also have $2000 next week for another purchase and will continue thinking about that purchase.

If the buys go through, GIS will become a 5-figure position in my portfolio and HRL will be a starting position. I have right now 8 positions that are 5-figures. It's great seeing my portfolio grow and grow over the years through my contributions and individual company growth.

General Mills is the traditional old school boring food stock. It yields 3.2% and has a slow single digit dividend growth. Sometimes GIS holds its dividend flat for several years but they have been paying dividends for over a hundred years straight. It is a defensive company that will still hold its own during recessionary times. The company is facing headwinds now as consumers look to healthy organic alternatives to processed food. I am confident GIS can weather the storm, and if its enterprise value falls I am sure someone like Kraft Heinz will scoop in to buy out the company.



Hormel historically been a high growth company with a small dividend. It recently increased its dividend by 17% and it has been an impressive dividend paying company for many decades. HRL is a dividend aristocrat yielding almost 2% now. Hormel's stats are very impressive. Year after year their earnings and revenues increase even with a slight blip in revenues from 2008-2009. The company has a very stable payout at 36% and the credit rating is high at "A". HRL has been flat for many months since the growth has failed to keep up with its escalating P/E ratio. HRL is starting to look more fair value compared to the days it was hitting $45 a share!

I sold HRL in Dec'16 for tax loss harvesting and right now the share price is around the same as when I sold it. I would like to get HRL back so this would be a good time to re-enter.


Both GIS and HRL are relatively "small" companies. GIS is around 35 Billion and HRL is only 18 Billion. The supermarket aisles are packed full now with many different brands trying to compete for aisle real estate. It's hard to expand and grow as a food company. There also is not much to innovate in terms of food besides going organic.

What many companies do now in the packaged foods space is to acquire other companies through cheap debt. By issuing the debt, they can increase their revenues and earnings. Cost cutting through synergies can also be done as seen by 3G's extreme efficiency measures on Kraft and Heinz. If the price of GIS and HRL fall or continue to stagnate, it's almost guaranteed a large buyer will come in to gobble them up eventually.

However, I don't recommend buying a company based on take over potential. Instead I want to buy a company I would want to own for the very long term (30+ years) because of their business fundamentals. Both of these companies have proven their resileance by lasting many many decades. Both of these companies are older than my grandparents. I have faith they will continue producing spam and cereal after I am no longer here.


-YD

5 comments:

  1. I also recently purchased some GIS for my portfolio. As you stated the company does well during a recession compared to others. I haven't looked into HRL lately but will be doing some research soon. Good article. Thanks for sharing.

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  2. I like both of these selections. I sold a GIS put earlier in the month and I'm watching HRL closely. I'll most likely buy HRL shares this week.

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  3. nice post, Im currently looking for a good us stock. GIS sounds good. I dont really know much about Hormel

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  4. Young Div -

    Thanks for sharing. Enjoy both companies, and would love to see Hormel dive a few dollars lower, as the current P/E's are slightly higher than where I'd like it.

    -Lanny

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    1. Gotta just pull the trigger when a quality company is fairly priced. Can't wait around all day for hero prices that may never come...

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