With all the uncertainty in the market due to high inflation, rising interest rates and a potential recession, not to mention ongoing geopolitical conflicts and the recent banking scare, many investors are looking for stocks that perform well in all types of economic environments.
As such, they may be interested in potential opportunities among consumer defensive companies that qualify for Benjamin Graham’s Lost Formula screen, a Premium GuruFocus feature.
Prior to his death in 1976, the legendary investor and economist, who authored "Security Analysis" and "The Intelligent Investor" and was Warren Buffett (Trades, Portfolio)’s mentor and professor at Columbia Business School, 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 the fact he was unable to publish it before his passing; therefore, it was lost from public knowledge for a time. Since the “father of value investing” also prioritized a minimum interest coverage of 5 with the companies he invested in, that element was included in the criteria as well.
A backtest of the strategy between 1926 and 1976 showed it would have outperformed the Dow benchmark by approximately twice as much.
Further, companies in the consumer defensive sector tend to perform well in unfavorable economic conditions due to their products being considered necessities. While its 12-month performance was negative, the sector has returned 1.39% year to date.
The screener found companies with market caps above $1 billion that met the criteria as of April 25 included Tyson Foods Inc. (TSN, Financial), Ingles Markets Inc. (IMKTA, Financial) and Cal-Maine Foods Inc. (CALM, Financial).
Tyson Foods
Tyson Foods (TSN, Financial) has a $21.57 billion market cap; its shares were trading around $60.66 on Tuesday with a price-earnings ratio of 9.01, a price-book ratio of 1.10, a price-sales ratio of 0.41 and an equity-to-asset ratio of 0.53.
Founded in 1935, the Springdale, Arkansas-based food company processes chicken, beef and pork products under the Tyson, Jimmy Dean and Hillshire Farm brands, among many others.
The GF Value Line suggests the stock is significantly undervalued currently based on its historical ratios, past financial performance and analysts’ future earnings projections.
At 84 out of 100, the GF Score indicates the company has good outperformance potential on the back of high ratings for profitability, growth and GF Value, a more moderate financial strength rank and low momentum.
Tyson Foods also has a sufficient interest coverage ratio of 9.81 and a predictability rank of 3.5 out of five stars. According to GuruFocus research, companies with this rank return an average of 9.3% annually over a 10-year period.
Of the gurus invested in Tyson Foods, Yacktman Asset Management (Trades, Portfolio) has the largest stake with 0.82% of its outstanding shares. The T Rowe Price Equity Income Fund (Trades, Portfolio) and Jim Simons (Trades, Portfolio)’ Renaissance Technologies also have notable positions.
Ingles Markets
Ingles Markets (IMKTA, Financial) has a market cap of $1.77 billion; its shares were trading around $93.30 on Tuesday with a price-earnings ratio of 6.43, a price-book ratio of 1.34, a price-sales ratio of 0.31 and an equity-to-asset ratio of 0.57.
Created in 1963, the company, which is headquartered in Black Mountain, North Carolina, operates a chain of grocery stores in the Southeastern U.S.
According to the GF Value Line, the stock is fairly valued currently.
The GF Score of 91 implies it has high outperformance potential, driven by high ratings for profitability, growth, financial strength and momentum. The GF Value rank, however, was low.
Ingles Markets has an adequate interest coverage ratio of 17.73 and a four-star predictability rank. GuruFocus found companies with this rank return, on average, 9.8% annually.
With 3.89% of its outstanding shares, Chuck Royce (Trades, Portfolio) is Ingles Markets’ largest guru shareholder. Other top guru investors are Mario Gabelli (Trades, Portfolio), Simons’ firm, John Hussman (Trades, Portfolio), Ray Dalio (Trades, Portfolio)’s Bridgewater Associates, Jeremy Grantham (Trades, Portfolio) and Joel Greenblatt (Trades, Portfolio).
Cal-Maine Foods
Cal-Maine Foods (CALM, Financial) has a $2.39 billion market cap; its shares were trading around $48.71 on Tuesday with a price-earnings ratio of 3.14, a price-book ratio of 1.55, a price-sales ratio of 0.75 and an equity-to-asset ratio of 0.77.
Established in 1969, the Jackson, Mississippi-based company produces and sells eggs. Its brands include Egg-Land’s, Land O’ Lakes, Farmhouse and 4-Grain.
Based on the GF Value Line, the stock appears to be significantly undervalued currently.
The GF Score of 80 is supported by high ratings for profitability, GF Value and financial strength as well as middling marks for growth and a low momentum rank. As such, the company is likely to have average performance going forward.
Cal-Maine Foods also has an interest coverage ratio of 2,411.32 and a one-star predictability rank. GuruFocus data shows companies with this rank return an average of 1.1% annually.
Diamond Hill Capital (Trades, Portfolio) has the largest stake in Cal-Maine with 3.27% of its outstanding shares. Simons’ firm, Steven Cohen (Trades, Portfolio), Dalio’s firm, Greenblatt and Caxton Associates (Trades, Portfolio) also own the stock.
Other potential opportunities
Additional stocks that made the screener were Coursera Inc. (COUR), which offers online classes for degrees and certifications, and telehealth provider Hims & Hers Health Inc. (HIMS).
