Get Premium to unlock powerful stock data

3 Consumer Defensive Stocks That Fit Graham's Lost Formula

These companies have high financial strength

Author's Avatar
Jan 24, 2022
Summary
  • Sanderson Farms, Freshpet and Cal-Maine Foods present potential value opportunities.
Article's Main Image

Ahead of the upcoming Federal Open Market Committee meeting later this week, U.S. indexes fell on Monday morning.

In the wake of the S&P 500’s worst week since March 2020, the Dow Jones Industrial Average slid 664.75 points, or 1.94%, while the S&P 500 Index fell 2.58% and the tech-heavy Nasdaq Composite retreated 3.16%.

As a result, investors may be looking to buy financially strong companies that qualify for Benjamin Graham’s Lost Formula screen, a Premium GuruFocus feature.

Prior to his death in 1976, the author of "Security Analysis" and "The Intelligent Investor" developed a refined formula that screened for companies with a price-earnings ratio of less than 10 and an equity-to-asset ratio of at least 0.5. The formula got its name from that fact that he was unable to publish it before his passing; therefore, it was lost from public knowledge for a time.

A backtest of the strategy from 1926 to 1976 showed it would have outperformed the Dow benchmark by approximately twice as much.

As supply shortages for a variety of goods continue impacting the economy, investors may be especially interested in finding value opportunities in the consumer packaged goods industry as these products are necessary regardless of market conditions.

The screener found that as of Jan. 24, companies that met the criteria were Sanderson Farms Inc. (

SAFM, Financial), Freshpet Inc. (FRPT, Financial) and Cal-Maine Foods Inc. (CALM, Financial).

Sanderson Farms

Sanderson Farms (

SAFM, Financial) has a $4.17 billion market cap; its shares were trading around $186.45 on Monday with a price-earnings ratio of 9.17, a price-book ratio of 2.26 and a price-sales ratio of 0.87.

The Laurel, Mississippi-based company is the third-largest poultry producer in the United States. Its products include fresh, frozen and value-added chicken, which is sold to grocers, food service operators and distributors.

The GF Value Line suggests the stock is fairly valued currently based on its historical ratios, past performance and future earnings projections.

1485657056634544128.png

Sanderson Farms’ financial strength and profitability were both rated 8 out of 10 by GuruFocus. In addition to a comfortable level of interest coverage, the robust Altman Z-Score of 9.38 indicates it is in good standing even though assets are building up at a faster rate than revenue is growing. The return on invested capital also overshadows the weighted average cost of capital, meaning value is being created as the company grows.

Although the company’s margins are in decline, its returns on equity, assets and capital outperform a majority of competitors. Sanderson Farms also has a high Piotroski F-Score of 8 out of 9, which means operations are healthy, and a predictability rank of one out of five stars. According to GuruFocus, companies with this rank return an average of 1.1% annually over a 10-year period.

Of the gurus invested in Sanderson Farms,

Jim Simons (Trades, Portfolio)’ Renaissance Technologies has the largest position with 1.46% of its outstanding shares. Jeremy Grantham (Trades, Portfolio), PRIMECAP Management (Trades, Portfolio), Ray Dalio (Trades, Portfolio), Joel Greenblatt (Trades, Portfolio), Mario Gabelli (Trades, Portfolio) and Caxton Associates (Trades, Portfolio) also own the stock.

Freshpet

Freshpet (

FRPT, Financial) has a market cap of $3.64 billion; its shares were trading around $83.71 on Monday with a price-book ratio of 5.04 and a price-sales ratio of 9.01.

The company, which is headquartered in Secaucus, New Jersey, manufactures specialty dog and cat food under the Nature’s Fresh, Deli Fresh, Vital and other brand names.

According to the GF Value Line, the stock is modestly undervalued currently.

1485664908136751104.png

GuruFocus rated Freshpet’s financial strength 8 out of 10, driven by a high Altman Z-Score of 65.29. Assets are building up at a faster rate than revenue is growing, however, indicating the company may be becoming less efficient. The Sloan ratio is also indicative of poor earnings quality.

The company’s profitability scored a 3 out of 10 rating. Although the operating margin is expanding, Freshpet is weighed down by negative returns that underperform a majority of industry peers. It also has a moderate Piotroski F-Score of 4, indicating conditions are typical for a stable company.

With 0.51% of outstanding shares,

Ken Fisher (Trades, Portfolio) is the company’s largest guru shareholder. Freshpet is also held by Steven Cohen (Trades, Portfolio), Ray Dalio (Trades, Portfolio), Chuck Royce (Trades, Portfolio) and Baillie Gifford (Trades, Portfolio).

Cal-Maine Foods

Cal-Maine Foods (

CALM, Financial) has a $1.99 billion market cap; its shares were trading around $40.72 on Monday with a price-book ratio of 1.99 and a price-sales ratio of 1.39.

The Jackson, Mississippi-based company produces and sells eggs.

Based on the GF Value Line, the stock appears to be fairly valued currently.

1485672894670381056.png

Cal-Maine’s financial strength was rated 7 out of 10 by GuruFocus. In addition to comfortable interest coverage, the company’s robust Altman Z-Score of 7.62 indicates it is good standing.

The company’s profitability scored a 6 out of 10 rating despite having negative margins and returns that underperform a majority of competitors. Cal-Maine also has a low Piotroski F-Score of 3, suggesting operations are in poor shape, and the one-star predictability rank is on watch as a result of revenue per share declining over the past several years.

Diamond Hill Capital (Trades, Portfolio) is Cal-Maine’s largest guru shareholder with a 5.17% stake. Other guru investors are Simons’ firm, Cohen, Third Avenue Management (Trades, Portfolio), Dalio and Charles Brandes (Trades, Portfolio).

Also check out:

Disclosures

I/we have no positions in any stocks mentioned, and have no plans to buy any new positions in the stocks mentioned within the next 72 hours. Click for the complete disclosure
Rating:
0 / 5 (0 votes)
Author's Avatar
WRITTEN BY

GuruFocus Screeners

Related Articles

Q&A with Gurus