Newsletter Watch: Food for thought
John Reese is founder and CEO of Validea.com and Validea Capital Management. His Validea newsletter uses a fascinating approach to stock selection. He screen stocks based on the investment criteria of the market’s most legendary investors.
In a recent special report on food stocks – and based on the strategies of Peter Lynch and James O'Shaughnessy -- the advisor has uncovered a trio of small-cap stocks: Village Supermarket Inc. (Nasdaq: VLGEA), MGP Ingredients Inc. (Nasdaq: MGPI) and Seneca Foods Corp. (Nasdaq: SENEA).
Reese explains, “Everybody eats. Sure, it sounds obvious, but it's the kind of thing that's important to remember when investing--particularly if you're still a little leery of where the economy's heading.”
“While people may hold off on buying new homes or cars or clothes when times get tough, the vast majority of us still head to the grocery store every week or so to buy food.
“Grocers, and the companies that supply them and other large-scale food operations, thus make for nice, reliable investments that are less subject to the waxing and waning of the economy than many other firms.”
In line with his overall bullish outlook on the food sector, Reese ran his screens, each of which, he notes, is based on the philosophy of a different Wall Street great. The stocks that pass this test, he suggests, are “good bets even if the economy heads south.”
“While larger grocer chains get more headlines, Village Supermarkets gets better reviews from my guru models,” Reese says.
He notes that the New Jersey-based small-cap ($346 million market cap) operates more than 20 ShopRite supermarkets, most of which are located in New Jersey. It is a member of Wakefern Food, a retailer-owned food cooperative that buys, warehouses and transports products to all ShopRite stores, including those operated by Village Supermarkets.
Reese explains, “The growth strategy that I base on the writings of James O'Shaughnessy is particularly high on Village Supermarkets, in part because of the firm's history of strong earnings growth.
“This model requires a company's EPS to have increased each year for the past five years; over the past half-decade, Village has posted EPS of $1.77, $2.10, $2.43, $2.55 and, most recently, $3.14, passing this test.
“To find growth stocks that are selling at a good price, O'Shaughnessy uses the price-to-sales ratio, which he has said is the most reliable ratio in terms of predicting the future success of a stock. Village Supermarkets, with a sparkling P/S of 0.33, passes with flying colors.
“My O'Shaughnessy growth model also involves relative strength, which measures how a stock has performed, price-wise, compared with all other stocks in the market over the past year. Village Supermarkets also passes this criterion.”
The advisor also looks to Kansas-based MGP Ingredients, with a $153 million market cap, which makes ingredients and distillery products that are used in foods, alcoholic beverages and non-food products such as ethanol fuel and starch- and protein-based polymers. (See “MGP Ingredients: A recipe for success,” Sept. 11.)
He explains, “Its ingredients focus on wheat proteins and starches, some of which are involved in creating the type of high-protein, low-carbohydrate and whole grain products that are so popular these days. MGP gets approval from both my Lynch- and Benjamin Graham-based models.
“My Lynch method likes the firm's 0.33 PEG ratio, while my Graham-based method likes its 2.14 current assets/current liabilities ratio, and its low long-term debt ($8.9 million compared with $48.7 billion in net current assets).”
Reese also sees solid potential at Seneca Foods a small-cap food processing company ($213 market cap) that specializes in fruits and vegetables. The firm, based in Seneca, N.Y., is another favorite of his Lynch-based model.
The advisor explains, “The stock’s 10.37 P/E and 45.74% growth rate (based on the average of the three-, four- and five-year EPS figures) make for an excellent 0.23 PEG, indicating that this fast-grower is selling at a very good price.
“In fact, with solid fundamentals that include strong earnings histories, manageable debt and healthy sales, the guru-model-approved companies I've mentioned should be good bets regardless of where the economy heads."
Steven Halpern's latest survey of the nation's leading newsletter advisors features 50 favorite stocks in the energy sector. Click here to get this free report.
About the Author
As a newsletter editor and financial journalist, Steven Halpern has covered the investment newsletter industry for 25 years.
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