You’ve heard this before. In tough times like these some market experts trot out the phrase “There’s always a Bull Market somewhere.” On 19 August of 2015 stock markets the world over sank into a malaise from which they have yet to recover. Call the malaise whatever you will – a correction; a crash; a panic; or the end of the world as we know it – it is real. The following chart shows the performance of our own ASX 200 and the DJIA (Dow Jones Industrial Average) from the US.
As we begin the final trading quarter of the calendar year uncertainty is the flavor of the day and likely to continue to be so. So where is that Bull Market hidden?
Check the ASX Sector Indices and you find no relief. All Sectors are still below their pre 19 August value – even the red hot Healthcare Sector. If you believe in the adage – Buy High, Sell Higher – you might find some hope.
The thinking behind the Buy High Sell Higher School of investing is relatively simple. It is market sentiment that drives stock prices, not fundamental reality. Market sentiment is about perception of how individual sectors and stocks will perform in current economic conditions. Given conflicting positive and negative views, investors of all stripes tend to opt for the worst case. Markets have been known to “shoot first and ask questions later” in the face of quickly developing bad news. Behavioral Finance experts tell us the explanation lies in the fact investors hate losing money more than they enjoy making money.
Despite this fact there are individual stocks that beat downtrends like the one in which we now find ourselves. To find them we began with a Stock Screener to look for stocks with a minimum P/E of 5.0 and a minimum 52 Week Price Change of +50%. The P/E was meant to filter out stocks without any earnings. The stock price appreciation was meant to uncover stocks with positive investor sentiment.
Next we looked at the price performance since the closing of trading on 18 August to spot stocks whose share price has gone up since the onset of the heavy downtrend. Believe it or not, we found 20 stocks that qualified from a variety of sectors; but the predominant type of business was food, and nutrition related stocks.
So why should you consider taking a look at these companies when markets are swinging up and down like a roller coaster with no certain end in sight?
For one thing, there are many who preach that stocks on a roll tend to stay on a roll. For another, there are a number of long term global demand trends in place and among them is the expanding middle class in the Asia-Pacific Region and their desire for better nutrition through better foods and nutritional supplements more common in developed countries.
If you are a believer in long term trends and the Buy High investing philosophy, here are five stocks in agriculture and nutritional related stocks. The table shows each company’s price appreciation year over year and since the close of trading on 18 August.
Closing Share Price
Closing Share Price
Year over Year %
Farm Pride Foods
In early 2015 prognosticators were merrily going about the business of predicting the next ASX stock to cross the $100 barrier. Cochlear Limited (COH) was a favorite a few years back and roared back in the running for the honor following a disastrous product recall in 2011. Commonwealth Bank of Australia (CBA) and CSL Limited (CSL) were now the most discussed prospects along with Cochlear. No one had Blackmores Limited (BKL) on the list. CSL got there first but BKL has now gone well over $100, besting CSL which fell below $100 and now trades at $89.94.
With a two year earnings growth forecast of 24.8% it would appear BKL is not going to slow down. The company’s fully franked dividend has a current yield of only 1.6% but dividends are forecasted to rise 14.8% over the next two years.
The company markets about 152 different nutritional health products from basic vitamins to supplements for arthritis and joint care; digestive health; stress relief; and weight management. Blackmores brands itself as a “natural health” company following the principles of naturopathy. Products are available in Australia, New Zealand, and Asia (China, Hong Kong, Singapore, Taiwan, Malaysia, Korea, and Kazakhstan) through supermarkets, retail pharmacies, health food stores, and mass merchandisers.
The company reported Full Year 2015 Results on 25 August with record revenues (up 36%) and profit (up 83%). Asian sales were up 26% to $83 million and have doubled over the last five years. However, Blackmores Management notes adding in the substantial number of Chinese shoppers buying direct from Aussie retailers raises the Asian contribution to BKL revenue to $150 million. Debt levels were reduced by 87%. In addition to rewarding shareholders with a handsome dividend, the company rewarded employees with a bonus of six weeks’ pay. The company established itself in China as a Wholly Foreign-Owned Enterprise (WFOE) to take advantage of free trade agreements, and expects China to a major growth driver in the future.
BKL is in line to benefit from two major long term trends – the aforementioned growth in Asian middle class – and also the aging population interested in natural health products. Blackmores has a lofty Forward P/E of 36.70 and some analysts feel the stock is a little pricey, but the 5 Year Expected P/EG ratio is more respectable at 1.70.
Bellamy’s Australia Limited (BAL) also serves the health conscious consumer with its line of organic baby and early childhood food products. The company offers more than 30 different healthy foods for babies and young children up to the age of three. Bellamy’s listed on the ASX in August of 2014 with a first day closing price of $1.30 and has risen close to 500% over that time. Bellamy’s market cap and share price are dwarfed by that of Blackmores but on a percentage increase basis; this small company has actually outperformed its mammoth counterpart over the past year. Here is a price performance chart comparing Bellamy’s and Blackmores.
Bellamy’s reported Full Year 2015 Results on 21 August with massive gains. Revenues increased 156% and net profit after tax (NPAT) shot up 617%. To put that profit number into better perspective, for FY 2014 the company’s profit was $1.3 million. NPAT in FY 2015 was $9.1 million.
The company has 56% market share in the Australian market and is expanding, both its product line and its distribution chain. Like Blackmores, big things are expected from Bellamy’s focus on expanding its existing presence in China where it is shifting from traditional retail outlets to an online e-commerce operation. The company also has a presence in Malaysia, Singapore, and Viet Nam.
Nufarm Limited (NUF) provides herbicides, fungicides, and pesticides to crop growers around the world for protection against weeds, insects, and disease. The company distributes its products in more than 100 countries around the world. Agricultural production is notoriously volatile with weather conditions being a major problem, from droughts to flooding. In addition, futures trading in soft commodities impacts price in ways not always predictable. Nufarm is joined at the hip with producers and the stock price over the last five years demonstrates the volatility of the sector. Here is the chart.
In March 2014 the company embarked on a reorganization strategy to improve operations. The Full Year 2015 Results showed a modest increase of 4% in revenues but a 35% rise in profit, with company management claiming the cost savings and performance improvements initiated contributed to the positive profit result. Despite concerns about El Nino related weather impacts in FY 2016 Nufarm management expressed confidence that FY 2016 would see another year of positive growth. With substantial operations in both the US and Europe the company is benefiting from the falling Aussie dollar. Nufarm is forecasted to grow earnings by 20.8% over the next two years.
The final two stocks in the table are both food producers. Capilano Honey Limited (CZZ) produces honey and Farm Pride Foods is in the egg business. Capilano makes about six variations of honey products for domestic sale and export to Europe, North America, the Middle East, the Indian sub-Continent, Asia and the Pacific Islands. In 2015 the company made two key acquisitions to meet increasing demand for its products, a honey producer and a processing and packing operation.
Honey production is vulnerable to weather setbacks and pesticides have adversely affected bee populations, most notably in the United States. This has served to increase demand for exported honey in that market and Capilano is benefiting from that as well as from the lower dollar. Australian honey is of premium quality and demand is growing in the Middle East and across Asia but honey production does not come without substantial risk. Droughts in Australia and concerns about the health of the bee population here could lead to major headwinds for Capilano. The company went public on 10 July of 2012 with a first trading day closing price of $2.15. The share price has risen close to 900% since that first day.
On 10 August the Capilano reported strong FY 2015 Results, with an increase of 40.5% in revenue and a 79% rise in profit. While Capilano still derives 84% of revenue from its core Australian market, revenues in other geographic areas are rising – up 29% in Asia; 36% in the US; and 33 in the Middle East.
The CZZ share price did drop post 19 August but has recovered. In contrast, the share price of our last stock, Farm Pride Foods (FRM) jumped. The following three month chart compares the two.
Farm Pride Foods produces shell eggs and processed egg products for distribution domestically and export to Asia. Farm Pride along with supply from local sources states they produce, process, and distribute about 8 million eggs every week. The company has a solid track record of performance with 10 year average earnings growth of 10.9% and 70% over three years. Total shareholder return over three years has been 62.2% with 34.7% over five years. Farm Pride Foods has a P/E ratio of 6.06 but with no major analyst coverage, forward looking growth estimates appear to be unavailable. Finding expert commentary on the stock is difficult. Full Year 2015 Financial Results showed a 5% drop in revenue but a 153% increase in profit. In the release, management cautioned that debate over the standards for what constitutes “free range” chicken and possible regulatory changes resulting could impact the company’s production. Add to that the El Nino concerns and the potential for Avian Influenza and FRM may be too high risk for most investors.
Please note that TheBull.com.au simply publishes broker recommendations on this page. The publication of these recommendations does not in any way constitute a recommendation on the part of TheBull.com.au. You should seek professional advice before making any investment decisions.