Stock of the Week: An Inflation-Busting 9% Yield
Alpesh Patel|March 3, 2023
Here’s my No. 1 rule for investing…
It’s not about the story. It’s about the numbers.
Just look at this week’s Stock of the Week. It doesn’t have a sexy story… but it’s got great numbers.
It’s a leading food producer with huge growth in its future. Profits are forecast to grow an outstanding 537%… and the stock is incredibly cheap.
Plus, the company pays an inflation-busting dividend yield of 9%.
Add to that the stock’s low volatility… and we have a Stock of the Week you won’t want to miss.
Click the image below to watch it.
Hi everyone. It’s Stock of the Week time, and I’ve got a fascinating one for you.
I’m Alpesh Patel, hedge fund manager and CEO of an asset management company which also has a private equity arm.
Each week my team puts in front of me a selection of companies – out of the universe of companies – that I should present to you, and then I narrow that down to the one I think is really interesting and worth speaking to you about.
So what have I got this week?
It’s very unusual, and it’s just to show you an important lesson when it comes to investing, which is: It’s not about the sexy story… it’s about the numbers. It is not about the narrative… it is about the data.
So this week’s company is Cal-Maine Foods (CALM).
Cal-Maine Foods is engaged in the production, grading, packaging, marketing and distribution of fresh shell eggs, including conventional cage-free, organic, brown, free-range, pasture-raised and naturally enhanced eggs.
Now, I know something about this. My family used to be in this business in India.
The shares are listed on the Nasdaq, and the company is headquartered in beautiful Mississippi.
The company has become profitable over the past five years, growing earnings by 27% per annum. Here’s a bit of a kicker… It pays a pretty good dividend as well.
So let’s look at some of those numbers.
On my Growth-Value-Income rating – remember, this is my proprietary indicator which rates stocks based on valuation, things such as share price to profitability, revenue growth, dividend yields, cash flow growth – this is a 7 out of 10, which means it meets my minimum threshold. You can imagine that threshold is pretty impressive if a company meets it.
CROCI, the cash return on capital invested, is 4.5%. Not as high as I’d like, but I don’t mind. If you want to know the importance of CROCI, the formula invented by Deutsche Bank and used by Goldman Sachs Wealth Management, have a look at the link below to learn more about that.
The stock’s six-month performance has been fairly good. The Sortino ratio, a measure of average performance versus the risk of missing that performance, is 0.72. That’s a pretty good number for a stock.
Volatility is very low. It’s not a volatile stock, which is good. I like low volatility if I can get good returns. And the stock has been outperforming the market, as exhibited by its alpha.
So where does this bring us?
Well, in terms of forecast growth, it’s really strong. Turnover is forecast to grow nearly 70%. Profits before interest and tax are forecast to grow 537%. Pretax profits are forecast to grow 616%.
Those are just ridiculous numbers, yet the valuation is forecast at a P/E ratio multiple of just 3.4.
That is cheap. That is cheap.
When we look at the dividends, we see an 8.3% forecast dividend yield. The recent yield has actually been closer to 9%, so that’s an inflation-busting dividend you’re getting on this company.
Not only that… turnover’s been holding up pretty strong as well. Assets have been increasing year on year. Net asset value’s been increasing. Total borrowing’s been decreasing.
All the things you want to see, so all good in that regard.
The only thing I’d say is it’s gone from $34 to closer to $60. So it’s almost gone up 100% in the past year. Okay, so slight problem in that, of course, it’s gone up quite a lot.
However, I think there is room for further growth, especially given that it looks significantly undervalued [on a discounted cash flow basis]. And you can see from the volatility graphs that I’ve shown there that in actual fact the company’s volatility is not that bad in terms of the likely worst-case scenarios over a period of time. It’s not too bad at all.
So, overall, very happy with it. No company ever ticks every box. This one gets pretty close.
Thank you very much. I hope you enjoyed these “tip of the iceberg” insights into the kind of analysis (a lot deeper of course) that my GVI Investor followers receive. So thank you all for watching.