Lack of Visibility
Let’s continue with the project of explaining my top 10 ideas.
There is no better phrase to explain my style of value investing than “lack of visibility”.
It has been my observation that Wall Street loves companies with great “earnings visibility”, and hates companies that “lack earnings visibility”.
My first job out of graduate school was to analyze the consumer non-durable stocks for a large bank trust department. All my portfolio managers wanted to own Proctor & Gamble and Coca-Cola because the memories of the early 1980’s recession were still fresh. All those “consistent” stocks, the “unit growers”, were selling at their 52 week highs. Down at the bottom of the list of every food stock analyst was Archer-Daniels-Midland. The analysts all hated the stock because ADM refused to estimate quarterly earnings. ADM had built a solid market position in the grain processing business, but nobody cared. I put ADM on the bank’s “buy list”, and not a single portfolio manager bought the stock.
Right then, I knew I would not be working for a bank trust department for very long. It was a great learning experience, but I thought there was a better way to do this business. The bank was '“covered” by every major Wall Street brokerage firm, and most of the significant regionals, back then that was about 30 firms. In my 2 years at the bank I never once recommended a stock that was on a Wall Street buy list. I went to hundreds of analyst meetings and let them “pitch” their best ideas, and then waited patiently to ask about the stocks they had “hold” ratings on.
My two favorite stocks at the current moment definitely fall into the category of:
built solid competitive business position, but lack earnings visibility
Corteva - CTVA - has consolidated the seed business down to themselves and two struggling German companies Bayer (Monsanto), and BASF. Syngenta, bought by the Communist Chinese, in also a small player. CTVA has secured 7000 patents in the last 5 years, this is not a grain processing company as most perceive it to be.
Tyson -TSN - has so succeeded in consolidating the meat packing business, that our distinguished FTC Chairwoman has called them out as a monopoly. When I can buy a “monopoly” at book value and 3.4% yield, sign me up as soon as possible.
I considered many other companies with unpredictable earnings, but right now CTVA and TSN are my favorites.
Nutrien - NTR, Mosaic - MOS, and FMC Corp. - FMC, are certainly top 20 ideas, but I need some diversification
Lindsay - LNN - makes irrigation equipment, but has Brazil issues
ADM is worth considering, but I worry about HFCS long-term
I need more time to work on small commodity processors like SunOpta - STKL, and Limoneria - LMNR
Phillips 66 - PSX - has had a run, but I love the story at some price, maybe HF Sinclair - DINO - a little cheaper
CNH Industrial - CNH - is the cheapest ag stock, but I fear the power of John Deere’s dealer network
All the industrial cyclicals have run, and I need a few negative GDP quarters to make them attractive again
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My top 5 ideas, in order, are:
Corteva -CTVA
Tyson - TSN
Royal Gold - RGLD
Chart Industries - GTLS
Kinder Morgan - KMI