It may seem a bit incongruous, but the truth is that value investing tends to be counter-intuitive to the mindset that most investors take to the market. I say incongruous because, at its most basic starting point, the principle of value investing fits well with rule #1 of investing in the stock market – buy low, sell high – but if you listen to talking heads and analysts, stocks that actually are available at significant discounts to historical prices generally get dismissed, while stocks trading at or near all-time highs get pumped even more, with predictions that the prices will continue to move higher.
Value investing becomes counter-intuitive because investors become conditioned to accept the notion – which is, honestly, often correct – that stocks tend to follow their longer trends. That’s a big reason why, when a stock has been going up, the general expectation is that it will continue to go up; it’s a variation on the idea that “a rising tide lifts all ships.” Value investing, however, also understands that all trends are finite, which means that eventually, all trends reverse and start to move in the opposite direction. That means that long, upward trends inevitably will fall into a downward pattern, just as extended downward trends eventually and always will find a bottom and move higher. That is where value analysis begins; if a stock is already trading at a significant discount to its historical highs, the odds begin to increase that when the downward movement reverses, the stock won’t just be cheap compared to previous price activity, but also in comparison to the underlying value of the business itself.
The caveat, of course, is that sometimes a cheap stock is just a cheap stock, having been beat down because there are serious problems in the company’s business that need to be corrected. That’s why effective value analysis also doesn’t simply take a historical price discount at face value – it also folds a thorough review of the company’s fundamental strength or weakness into the picture to determine if there is a basis to say the stock should be higher than it is right now. This second component is the reason that I think value analysis is so effective at finding useful opportunities in any market condition, because it gives me the ability to compare the stock’s current price, no matter whether the current price trend is up or down, against the company’s book of business. If the value proposition is in place, then there is an opportunity to work with the stock that, in the long run, should provide healthy profits that I may miss if I simply try to chase the latest growth stocks in an effort to keep up with the market. It also means that when the market turns seriously bearish, I should be able to avoid being on the sharp end of that downturn.
In that vein, let’s turn our attention to today’s highlight. ConAgra Brands Inc. (CAG) is a stock that I’ve followed some time, and make sure to run a fresh analysis on every so often. While most market media WAGs and talking heads tend to dismiss Food stocks because they’re “boring,” I think that they are especially useful under current market conditions. The initial, downward economic push from the COVID-19 pandemic sent a lot of families rushing to the grocery store to stock up on food items they could pack away in the pantry or the freezer so they could get through shelter-in-place and self-isolation orders across the country. New data from a number of packaged food companies, including CAG’s latest earnings report, supports the idea that eat-at-home – and so the need to keep pantries, fridges and freezers well-stocked – is a long-term, possibly permanent shift in consumer trends. That is supported by a growing corporate trend to keep remote workers at home, increasing infection rates that continue to limit the availability of dine-out options, and the reality of continued high unemployment numbers that naturally force consumers to tighten their belts while they look for work.
This year’s pandemic-driven struggles have meant that while many other sectors continue to deal with serious sales declines, stocks in the Food Products industry, including CAG have, by contrast enjoyed significant boosts in sales and earnings. For CAG, that has translated to material gains in critical measurements like free cash flow, liquidity, and Book Value. At the early stage of the pandemic, my analysis put a “fair value” target for the stock at around $38.50 per share; but a few months later, and a new set of financial data from the last two earnings reports to work with have actually given me a reason to lift that number – which is unexpected, even in this industry, under broadly uncertain economic conditions. That means that if you’re looking for a smart place to put your money to work for you, CAG is a stock you should be paying attention to.
Fundamental and Value Profile
Conagra Brands, Inc., formerly ConAgra Foods, Inc., operates as a packaged food company. The Company operates through two segments: Consumer Foods and Commercial Foods. The Company sells branded and customized food products, as well as commercially branded foods. It also supplies vegetable, spice and grain products to a range of restaurants, foodservice operators and commercial customers. Conagra Foodservice offers products to restaurants, retailers, commercial customers and other foodservice suppliers. The Company also operates in the countries outside the United States, such as Canada and Mexico. The Company’s brands include Marie Callender’s, Healthy Choice, Slim Jim, Hebrew National, Orville Redenbacher’s, Peter Pan, Reddi-wip, PAM, Snack Pack, Banquet, Chef Boyardee, Egg Beaters, Rosarita, Fleischmann’s and Hunt’s. The Company sells its products in grocery, convenience, mass merchandise and club stores. CAG’s current market cap is $18.1 billion.
Earnings and Sales Growth: Over the last twelve months, earnings increased about 63%, while Revenues rose by a little over 12%. Earnings and sales dropped in the last quarter – to -6.67% and -18.52%, respectively – but that doesn’t paint a complete picture of the company’s profitability, which is strengthening noticeably. The company’s margin profile over the last twelve months is healthy, with Net Income at 8.77% of Revenues over the past twelve months, and improving nicely in the last quarter to 12.28%.
Free Cash Flow: CAG’s free cash flow is healthy, and strengthening at about $1.53 billion. That marks a steady increase from $1.4 billion in the quarter prior, $905.9 million in the quarter before that, and $575.6 million at the beginning of 2019. The current number also translates to a useful Free Cash Flow Yield of about 8.37%.
Debt to Equity: CAG has a debt/equity ratio of 1.09. That number has declined steadily from 1.58 at the beginning of 2019, but the number remains high, a reflection of the reality that the company’s liquidity remains a question mark. In the last quarter Cash and liquid assets were $438.2 million – a decline from $553 million in the quarter prior, but still significantly above the $99 million registered two quarters ago, versus $8.9 billion in long-term debt. Most of that debt is attributable to CAG’s acquisition of Pinnacle Foods in the last quarter of 2018. The complexities associated with the transition of the two companies into one is part of the reason the stock struggled into the early part of 2019, but reports in the last three quarters indicate that the synergies the company has worked to achieve have been working. In the last year, long-term debt declined by a little over $2 billion, which is a positive, and is highlighted by a reduction in long-term debt over the last two quarters of about $750 million.
Dividend: CAG pays an annual dividend of $1.10 per share – which the company increased from $.85 in the latest earnings call, and which translates to an annual yield that of about 2.96% at the stock’s current price. I’ve found it noteworthy to find stocks that have maintained their dividends under current economic conditions, which makes an increase in dividend payout even more rare and useful from a fundamental perspective.
Price/Book Ratio: there are a lot of ways to measure how much a stock should be worth; but I like to work with a combination of Price/Book and Price/Cash Flow analysis. Together, these measurements provide a long-term, fair value target at nearly $47 per share. That means the stock is nicely undervalued, with about 26% upside from its current price.
Technical Profile
Here’s a look at the stock’s latest technical chart.
Current Price Action/Trends and Pivots: The chart above marks the stock’s price activity over the last year. The V-shaped pattern of the stock’s drop from the beginning of the year, followed by its rapid rise from a bear market low at around $23 in March is obvious. The red diagonal line marks the stock’s upward trend from its March, bear market low at around $23 to a late-August peak at around $39.50. It also provides the baseline for the Fibonacci retracement lines shown on the right side of the chart. At the beginning of September, CAG dropped back off of that 52-week high to find new support at around $34 – a little above the 38.2% retracement line – and push higher again to a peak in the last week at around $38. The stock has faded back from that level a bit, and could be looking to establish a new support base in the $36.50 to $37 range, but support realistically could lie anywhere between $37 and $34 right now. Given the strength of the upward trend that has formed since March, any kind of pivot higher off of support – no matter whether that support occurs at $37, $34, or somewhere in between – could give the stock a new springboard to rally higher and test the 52-week high around $39.50. A drop below $34, however could mark a bearish trend reversal, with room to see the stock fall to around $32 before finding next support.
Near-term Keys: From a fundamental standpoint, CAG’s profile is very attractive, and its value proposition is compelling even with the stock’s increase since March. I think that demand for packaged food products such as what CAG offers is going to remain consistent, and that should mean that CAG will continue to stand out in the stock market through the year. If you prefer to work with short-term strategies, use a bounce of off support anywhere between the stock’s current price and $34 as an interesting signal to consider buying the stock or working with call options, with $38 as an attractive exit target. A drop below $33, on the other hand could offer a useful signal to consider shorting the stock or working with put options, using $31 to $29 as a quick exit target on a bearish trade.