A lot of times in investing, opportunities and times for action don’t happen on schedule. They just happen and you have to be ready to execute. That is the great benefit of having an investment ideology and The List of companies you’ve done your homework on and are ready to buy if the price is attractive enough and the fundamentals of the business haven’t changed from when you were evaluating the company. This past month a few opportunities popped up that allowed me to jump on right away.
Added to position in Imperial Oil (Ticker: IMO)
After firming up in the mid $50’s range, oil prices proceed to fall down to the mid $40’s in May and took oil stocks down with it. With Imperial stock falling below $40, I thought it would be a good opportunity to add some more shares and average my costs down. When I bought IMO originally my cost of $50 but now with the recent purchase it’s now down to $42.
Despite attempts by the Saudi’s to cut production, supply continues to grow. US shale production continues to plug away and crank oil out. Many schools of thought are thinking that oil prices will float around its long term historical price range of $45-55/barrel and may trade around that level for a long while. If that is the case, oil companies will do fine and have more than enough capability to be profitable at this level. A strong US$ which has an inverse relationship with oil and commodity prices could also make this stick, especially if the US slowly keeps increasing interest rates.
Frequent visitors to my blog will know that I’ve held positions in Tyson Foods and Cal-Maine Foods before. In fact this will be my third time that I’ve decided to buy these stocks and each time they have delivered a decent return in the past. They have been on The List of stocks I would always consider buying if the price was right. In both cases, an opportunity appears to have presented itself to get back in.
Cal Maine Lays and Egg
CALM stock is back to the level I previously bought in ($37.80). Many of the elements that I wrote in the past are still relevant to the firm. The stock continues to take a hit. It’s down almost 25% in the last 12 months. The big reason is egg prices continue to fall. The average price of dozen eggs is $0.60 lower in March 2017 than March 2016. Overall, egg prices are at a 10 year low. The egg industry is clearly in a down cycle. The question is there light at the end of the tunnel? Traditionally egg prices sink between January and March and then rise solidly the rest of the year. 2016 was the only year it didn’t work that way.
Despite this the fundamentals of the business are strong. The company continues to generate tangible profit in a weak market. At some point the market will turn the other way. The company is still the market leader for egg production and distribution. The financial statements looks solid. It has minimal debt and about $189 million in cash. The down cycle in fact could create opportunities for the company to buy smaller egg producers which could further reinforce its dominant position. It has in fact been doing so, closing a couple of deals to buy Happy Egg Farms and Foodonics International. With these acquisitions, it is estimated that CALM controls about 23 percent of US egg production.
On an anecdotal side, I can’t help but wonder if the impact of the move to offer all day breakfasts in fast food restaurants could put jump in egg demand. The stock reached the $37 level that I bought in the last time, so I decided this would be a good opportunity to build a position again and slowly build up.
When I wrote about my decision to sell in January, there were reports of a severe bird flu that could be hitting the industry. The stock was trading at $64 when I sold and I made a poultry (excuse the pun) 6.4 percent. My thinking at the time was if this bird flu thing goes down the stock could get taken down. Sure enough it did get taken town, but more so because of some fire issues at some plants that took down the production and it was apparently enough to meaningfully impact the earnings. The stock got taken down almost 10 percent because of it.
When I got passed this, the fundamentals of the business remain relatively intact. It is still the largest meat distributor in the US and a major player in all elements of the meat production food chain. It still generate excess returns on invested capital. The stock fell back to the $58 level which was my entry point last time. The industry appears to be in a down cycle again and that has taken the stock with it downward, however, the management team has demonstrated that they can navigate the company successfully especially during times where forces beyond their control can reap negative consequences. When the cycle turns as it did the previous times I owned it, the stock has taken a nice move up. I can see this happening.
Aren’t you trading these stocks instead of investing?
If I am getting in and out of these stocks on an iterative basis, am I not essentially trading stocks? On the surface it looks like, however, events occurred in short order either from a negative perspective or from a perspective that the stocks popped very fast, forcing me to take profits. The reality is I am very comfortable with holding these stocks for very long periods of time to get the returns I am seeking. Investing unfortunately doesn’t set estimated arrival times for stocks to generate returns. In my latest iteration I am happy to hold these stocks for a long time andbuy more if the prices fall further.
Bite Size Returns Easier to Digest
For me what I’m comfortable hitting singles and doubles and generating bite sized returns in the 20-30 percent range instead of trying to find the next “It” company and hitting a home run. If I can earn these bite size returns and earn them iteratively than I feel I can generate those super-sized returns without putting too much long term risk. That’s my comfort zone. Other’s may have higher or lower return expectations and thresholds. It’s all good. We all have different investing paths and on ramps/exit ramps.
Expect the Unexpected in Investing
When you have that List and an investment plan in your back pocket, a lot of times you are spending your time waiting for those stocks to come back to you. A lot of the time, they will show up to you when you least expect it. This month was a good example of it because I had no inclination of picking up these stocks anytime soon.