Among stocks in the packaged foods industry, Flowers Foods Inc. (FLO, Financial) and The Hershey Company (HSY, Financial) are two of the cheapest stocks, according to the Walter Schloss Screener. Usually, when a stock becomes cheap, more gurus buy the stock. However, many gurus are reducing their position in Flowers Foods despite having a cheap stock.
Walter Schloss and his 'cheap stock' screener
One of Ben Graham’s high-performing students, Walter Schloss made gross annual returns of 21% during a 50-year time span, according to a research article on Schloss’ investment philosophy. Schloss targeted stocks that are undervalued based on their asset values: The investor buys a stock at low prices relative to the company’s book value. Additionally, Schloss avoids stocks that have high debt and emphasizes those that are near two- to three-year lows.
Three years ago, GuruFocus implemented a screener with filters that meet Schloss’ investment philosophy. Since Schloss preferred stocks that trade near two- to three-year lows, the screener filters the stocks that are at most 25% above three-year lows. Additionally, the screener only lists stocks that have a price to tangible book ratio less than 1.0. Finally, for a stock to meet the “little or no debt criteria,” the stock must have an Altman Z-score of at least 2.99 and interest coverage of at least 10.
One criterion that hasn’t been mentioned is the “understandable business” criterion. Although this suggests that the company must have a business rank of at least 4 stars, Walter Schloss did not mention anything about business predictability in his screener. The sample Schloss screener below also requires a 1-star business rank so companies that have a questionable business are not listed on the screener.
A tale of two companies
During the past quarter, Flowers Foods and Hershey’s have experienced conflicting views from gurus. Joel Greenblatt (Trades, Portfolio), the investor who introduced his magic formula, eliminated his Flowers Foods position. John Keeley (Trades, Portfolio), Chuck Royce (Trades, Portfolio) and Paul Tudor Jones (Trades, Portfolio) cut their Flower Foods positions by 14.14%, 39.62% and 18.70%. On the other hand, seven gurus bought or increased their Hershey’s position in the past quarter, including Greenblatt, who increased his portfolio by 0.52% by purchasing 507,211 new shares.
The two companies have similar profitability and growth metrics: both Flowers Foods and Hershey’s have a profitability and growth rating of 7 out of 10. Although Hershey’s has more volatile Greenblatt returns on capital during the past 10 years, the chocolate confectionary firm currently has a slightly higher Greenblatt ROC than Flowers Foods does. Additionally, Hershey’s Greenblatt ROC currently outperforms 84% of global confectioners companies.
Although Hershey’s returns on equity are generally higher, they are more volatile and decreased between 2012 and 2015. Despite this, Hershey’s return on equity as of March is 100.50, higher than 97% of companies in its industry.
Flowers Foods attracted many guru sells likely because it has a weaker financial outlook than Hershey’s does. During the past 10 years, the 2000 bakery firm’s Altman Z-scores have decreased year over year to its current value of 3.01. If the company’s Z-score decreases further, Flowers Foods may begin experiencing bankruptcy threats. On the other hand, Hershey’s Z-scores have increased during the 10-year period, suggesting that the chocolate confectioner company has recently strengthened their business.
Although Flowers Foods generally had higher equity to asset ratios, the bread company currently has worse cash to debt ratio and interest coverage than Hershey’s does. With a cash of debt ratio of just 0.01, lower than 97% of global packaged foods companies, Flowers Foods is severely unable to repay its debt with cash. Hershey’s, on the other hand, has cash to debt ratio of 0.11; however, this still underperforms 80% of global confectioners companies.
The All-in-One Guru Screener 'demystified'
One of the most powerful features on the GuruFocus website is the All-in-One Guru Screener. With over 120 filters, users can create their own screeners and implement them into their investment strategies. Furthermore, users can customize their own filters using the “Create New Filter” button on the “Customize” tab.
As users select the filters for their screener, stocks that meet all the criteria will be listed below the screener. The default tab is the “Active Filters” tab, which, as the name suggests, details the selected filters for each of the stocks listed on the screener. For example, a simple screener may have the following criteria:
- The company has a market cap of least $5 billion.
- The company has an EPS of at least 10.
- The company’s return on equity is at least 15%.
On the “Active Filters” tab, the financial metrics listed will be the company’s market cap, EPS and ROE, the three filters that are selected above. The other tabs provide different financials, based on their headings:
- Fundamental: gives key information about the stocks –Â for example, industry, market cap, price, yield, number of shares, etc.
- Valuation: gives the three valuation ratios (P/E, P/B, P/S) as well as DCF valuations.
- Profitability: gives the margins, like operating margin and gross margin.
- Growth: gives information about one-year, five-year and 10-year EBITDA and EPS growth, for example.
- Dividend: gives dividend yield, dividend payout ratio, etc.
- Guru Buy/Sell: gives information about which gurus have bought or sold shares of the stocks meeting all criteria (the “active stocks”).
- Insider: gives information about insider buys and sells for the active stocks.
- Guru Consensus: gives information about the total number of guru holders for a stock.
- Peter Lynch Charts: gives the earnings line for each of the active stocks.
Additionally, there are two other tabs that are worth mentioning: Backtesting and Valuation Map. GuruFocus recently added these two features to improve the site.
The All-in-one Guru Screener is a powerful tool, but it is only available to Premium members. Everyone is encouraged to sign up for a free seven-day trial of the Premium membership and explore this powerful screener.
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