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Stock Screen: Stocks with Low Risk - August 22, 2012
Investors can usually find stocks with low risk or stocks with strong expected relative price performance fairly easily. The challenge comes when you want to combine these two features, as the presence of one attribute often means that a stock lags in the other. In this screen, however, we seek to combine the best of both worlds, and search for issues that meet both of these criteria. To generate our list, we first required that all stocks be ranked 2 (Above Average), or higher, for Safety and 3 (Average), or better for Timeliness (i.e. relative price performance in the year ahead), two of Value Line’s many proprietary ranks. Then, to further reduce the relative collective risk that is usually associated with stocks that offer high returns, we limited our cut to equities with a Price Stability Index (another one of Value Line’s proprietary measures) in the upper 10% of our universe (the Index runs from 5 to 100, with 100 being the top score). Finally, we required that each stock pay a meaningful dividend, with a floor set at a yield of 2.1%.
Not surprisingly, equities arising from this screen are largely considered defensive in nature, and our list is dominated by established and conservatively run companies, including Kraft Foods (KFT - Free Kraft Stock Report) and Wal-Mart (WMT - Free Wal-Mart Stock Report).
Kraft Foods is the world’s second largest food company with revenues of $54.4 billion and earnings from continuing operations of $4.8 billion in 2011. Kraft sells products to consumers in approximately 170 countries. The company’s brands span six consumer sectors as detailed in its 10-K as follows:
• Biscuits – primarily cookies, crackers and salted snacks
• Confectionery – primarily chocolate, gum and candy
• Beverages – primarily coffee, packaged juice drinks and powdered beverages
• Cheese – primarily natural, processed and cream cheeses
• Grocery – primarily spoonable and pourable dressings, condiments and desserts
• Convenient Meals – primarily processed meats and lunch combinations
Its product portfolio includes twelve brands with annual revenues over $1 billion each: Oreo, Nabisco and LU biscuits; Milka and Cadbury chocolates; Trident gum; Jacobs and Maxwell House coffees; Philadelphia cream cheeses; Kraft cheeses, dinners and dressings; Oscar Mayer meats; and Tang powdered beverage. It also has 80 brands that each generate annual revenues of more than $100 million.
The company reported strong second-quarter results, with organic sales growth at a solid 3.4% and the operating margin growing 180 basis points year over year. The U.S. operation was the primary driver, thanks to Cheese, Convenient Meals and Snacks segments. Brands that stood out include: Kraft Macaroni & Cheese, Kool-Aid, and Oscar Mayer Lunchables. The company has had success passing higher input costs onto customers via price hikes.
Kraft is moving ahead with plans to split into two separate public companies, and has set October 1st as the spinoff date. The first company (to be called Kraft Foods Group and trade under the symbol KRFT) will encompass the mature North American grocery business, which will likely remain a cash cow and offer defensive-minded investors an above-average dividend yield. And the second (to be called Mondelez International and trade under the symbol MDLZ) will consist of the faster-growing international snacks division. That business ought to trade at a higher price-to-earnings multiple than most other participants in the packaged food industry, considering its large exposure to emerging markets, most notably China, and the ongoing strength of the biscuits and candy categories.
New product introductions and increased penetration of emerging and developed international markets are key revenue growth drivers. We also expect more synergies from the blockbuster 2010 Cadbury acquisition and see room for further cost cuts to benefit profitability. The current yield of 2.85% may interest income-oriented investors.
Wal-Mart Stores, Inc.
Wal-Mart is the largest retailer on earth by sales. The company employs an everyday low price strategy in order to prove to customers that its prices will not change due to frequent promotional activity. Wal-Mart’s three reportable segments include Wal-Mart U.S. (60% of fiscal 2011 sales), Wal-Mart International (28%), and membership warehousing outfit Sam’s Club (12%).
The company delivered strong results in the second quarter. U.S. same-store sales advanced 2.2% which was toward the high end of the 1% to 3% guidance range and marked the fourth consecutive positive comp. Traffic was positive for the third straight quarter and made up 18% of the advance. The average transaction amount drove the remainder. Momentum grew throughout the quarter, with July being one of the strongest months so far this year, partly due to a strong showing around the 4th of July holiday. An effective TV ad campaign highlighting WMT's low prices on baskets of goods appears to be helping win back customers and attract new ones.
Recent success has driven the share price up 20% year to date to the low $70s. This advance came after the share price stagnated in the $45 to $55 range for the better part of a decade. The shares are now trading at a higher price to earnings ratio than in the past, which may dissuade some value investors from jumping in. We think investor enthusiasm may continue to propel the shares. Although international store expansion may slow in the near term due to location selection missteps in China and Brazil, we expect this to be remedied soon and for mid-single digit square footage expansion to commence. An impressive e-commerce and mobile phone strategy are also potential revenue drivers.
At the time of this article's writing, the author did not have positions in any of the companies mentioned.