Thinking Out Loud Again + Conagra - CAG!?
Let’s take a brief moment to review why I am writing this blog/semi-book.
I was inspired by chess players that began to publish online accounts in real time of chess games they played. The basic idea was to “think out loud”. One of my favorites was a player named John Bartholomew.
I am not sure if this link will work in Substack. If it does not, please Google “dream nimzo indian”. Just try to watch the first 5 minutes to get the spirit of what John is trying to do.
I am trying to do the same thing with building a value portfolio.
When I started in November of 2023 I had not looked at all the potential stocks. Now I can say that I am officially done looking for completely new ideas. How do I know I am done?
Yesterday I went page by page through the Value Line and only wrote down 6-8 new names that were not already on one of my “Lurking” lists. I also did a screen of all non-financial US headquartered companies with market caps over $500 million, and got about 1800. From that list, I selected my Top 20 Model and a “lurking” list of about 250 companies.
I will continue to add stocks to that list as some stock fall in price and therefore become better value ideas. I will continue to look at other value portfolios for new names. Building the “universe” is never done, but I would now call it “substantially complete”. It took about two years to complete the job, but I took some writing breaks along the way. If I had worked straight through, I think it would have taken 12-15 months.
If I were starting all over I might suggest the following procedure:
Build a list of 100-300 stocks where you have done at least a “1-hour analysis”, Choose from stocks closer to their lows, selling at below average valuations, owned by other value managers, and/or that have reduced Wall Street expectations. These terms are meant to be vague. Creating this list is an art, not a science. But get started, looking at lots of companies is the goal.
Decide on how many stocks to own in the portfolio. Less than 15 is too little diversification, but more than 50 is too indecisive.
Try to find as many “special situation” stocks as you can. These are stocks you want to own without regard to economic and market conditions. They are out there if you look. I think I have 9 : Corteva, Nutrien, Darling, HF Sinclair, Chart, Royalty Gold, Red Rock Resorts, FirstCash, and Nexstar. I want to own these stocks no matter what the economy is doing.
Decide if you want any exposure to energy. I do so I own Halliburton. I do not want any exposure to financials or technology, so I have no stocks in those industries right now. I consider all three of these industries special cases.
Try to make some forecast about the market and the economy, and pick your remaining stocks accordingly. I am negative about the market and economic outlook, so I am playing defense.
I own Revvity, Royalty Pharma, Tyson, Treehouse, Kinder Morgan and Rayonier to “play defense”.
I own Brunswick, Jack in the Box, Titan International, and Middleby because my economic/market forecast might be wrong, and I want to be hedged.
If I felt economic conditions were “normal”, I would replace Revvity, Treehouse and Kinder Morgan, with Hasbro, Oxford, and Polaris.
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Conagra Brands - CAG - $29 started earnings season with a stinker. The problems were primarily short-term (a problem with Hebrew National hot dog production). Growth in the main brands (frozen food and snacks) was slow, but ok. The balance sheet is marginal, but getting better, 3.6x Debt/EBITDA on its was to 3x. Expectations are low, 3 buys vs 13 sell/holds. Stock buybacks are minimal, and there are no value “sponsors” The yield is nice, and the PE is low, but I cannot find one major positive to “hang my hat” on. A lack of negatives is usually not enough, but there are not enough alternatives.
Right now I want to find something better in the next month. Right now I fear CAG might be better than Treehouse or Kinder Morgan, but I want to find something better. Let’s pray for some earnings catastrophes. Lamb Weston had bad numbers, and is still a mess. Constellation Brands - STZ - $245, might be a stock to think about around $200. STZ reported a weak quarter for wine, not a good report for Duckhorn.