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Steven Chen
Steven Chen
Articles (184)  | Author's Website |

The 'Taste Good' Portfolio

Our six picks of high-return, steadily-growing, customer-winning businesses in one of the least disruptive spaces

According to British star money manager Nick Train, products that taste good should drive long-term returns, which is one of the three big strategic ideas underpinning his investment approach. "I don't think technology is ever going to take away the attraction of a product that consumers enjoy eating or drinking," Train described.

Although the theory makes sense conceptually, we think that it can be a beneficial exercise to practice it by constructing a hypothetical "taste good" portfolio. Here is the problem: all food and beverage businesses should think of their products as being "tasty." In the end, it is their job to make customer-winning products. Additionally, consumer tastes can vary subjectively and evolve considerably over time. Investors would need to stay away from products that are riding a fad.

Therefore, we are defining the following criteria for our "taste good" picks:

  • A consistently high return on capital,
  • A substantial moat, and
  • Steady top-line growth over the past few years.

Based on theses criteria, our "taste good" portfolio contains six companies ranging from micro-cap to large-cap across various categories, including drink, spice, frozen food, salad dip and even salmon. We created the hypothetical portfolio here at GuruFocus in order for us to track and review the results periodically.

Fevertree Drinks PLC

UK-based Fevertree (LSE:FEVR) develops and supplies premium mixer drinks, including tonics, ginger ale, ginger beer, bitter lemon, lemonades, spring soda water and premium cola. The brand was founded in 2005 with the mission to "combine the highest quality naturally sourced ingredients with expert manufacturing techniques to produce an unrivaled drinks experience."

Over the past five years, the business consistently earned an annual return on assets above 17% while achieving a compound annual growth rate of nearly 60% in sales.

Nichols PLC

UK-based Nichols (LSE:NICL) is an international provider of still and carbonated soft drinks. While the company owns a diversified portfolio of brands, its primary business has been built around the classic British Vimto drink, which has existed for more than a century now.

Over the past five years, the business consistently generated an annual return on assets above 18% while delivering a compound annual growth rate of more than 6% in its top line.

Armanino Food of Distinction

With only a bit over $100 million in market cap and 42 employees, California-based Armanino Foods of Distinction (AMNF) produces upscale and innovative frozen and refrigerated food products, including pesto and other sauces, stuffed pasta products and cooked meat products.

Armanino's reputation for superior quality helps the company build an economic moat in the premium food segment. To compete favorably, the company markets its products based on quality and natural ingredients rather than price.

For the last five years, the business generated an annual return on assets above 26% while delivering a compound annual growth rate of 7.7% in its top line.

Lancaster Colony

Ohio-based Lancaster Colony (NASDAQ:LANC) is a manufacturer and marketer of specialty food products for the retail and foodservice channels, primarily in the U.S. With a market cap of $4 billion, the business supplies 16 of the top 25 national restaurant chains and possesses market-leading positions in six retail food categories. For instance, Marzetti, New York Bakery and Sister Schubert's are popular names that use the company's produce dip, frozen garlic bread and frozen rolls, respectively.

Over the last five years, the company consistently generated an annual return on assets above 15% while achieving a compound annual growth rate of 4.7% in its revenue.

SalMar ASA

Norway-based SalMar (OSL:SALM) is one of the world's leading producers of Atlantic salmon, with farming operations in Norway, Scotland and Iceland. The company owns the unique intangible assets of production licenses in critical regions and manages to maintain its low-cost production with scale.

Over the past five years, the business consistently earned an annual return on assets above 10% while delivering a compound annual growth rate of over 12% in its sales.

McCormick & Company

Maryland-based McCormick (NYSE:MKC) specializes in the manufacturing and marketing of aromatic products (e.g., spices, herbs, seasonings, marinades and flavorings) to food processing companies and food product distributors. With a market cap of $20 billion, the company takes up roughly a fifth of the global spice and seasoning market – nearly four times the size of the next-largest branded peer.

Over the past five years, the company consistently earned an annual return on assets above 6% while achieving a compound annual growth rate of over 4.7% in its top line.

Disclosure: The mention of any security in this article does not constitute an investment recommendation. Investors should always conduct careful analysis themselves or consult with their investment advisors before acting in the stock market. We own shares of Nichols PLC and Armanino Food of Distinction.

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About the author:

Steven Chen
Steven CHEN is a quality-focused investor (with bottom-up opportunistic approaches), an ex-hedge fund analyst on Wall Street, a serial entrepreneur, computer scientist, and free-market capitalist.

Steven is the Managing Partner of Urbem Partnership, a value/quality-focused investment partnership fund (www.urbem.capital), and Urbem Capital, the research boutique that focuses on the highest-quality 0.1% of all public companies worldwide.

Steven can be reached at [email protected] or through LinkedIn.

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