Dean Foods: What did Santa wash down his cookies with?

unknown-4Dear Mr. Market:

Normally we write you a series of letters about the stock market or the economy. As we wrap up 2016, however, we decided to share an article that was recently published on Seeking Alpha. The proverbial ‘Santa Claus rally’ seems to perhaps have taken place before Christmas this year but what opportunities might there be going into 2017?

This interview reviews questions around a stock we’re interested in adding to some portfolios; Dean Foods (DF). Enjoy!

Summary

  • Despite trading at 52-week highs (and ~30% gain over the last three months), DF is still undervalued relative to peers.
  • As the clear market leader in fluid dairy, DF enjoys significant economies of scale – a critical advantage in a commodity-related business.
  • “Skating to wear the puck is going” with leading position in healthy dairy products such as TruMoo.
  • Friendly’s ice cream acquisition was immediately accretive, highly complementary, and further cemented its growing position in branded ice cream.
  • Takeover rumors that surfaced in October provide a floor for the stock.

What is one of your highest conviction ideas right now?

As plain and simple as a glass of milk might sound, we really like Dean Foods (NYSE:DF) right now. With a new year upon us and investors scouring for names that might benefit with a new administration, sometimes the best answer is to look at leading companies that are not in the spotlight but right in your fridge!

Can you provide a brief overview of what the company does?

Dean Foods is a leading U.S. processor and distributor of milk and other dairy products. The company has been around since 1925 and is headquartered in Dallas, TX. DF is surprisingly much larger than its next closest competitor but if you ask most investors to name any companies in this space they may not have a grasp of the landscape. Several of DF’s products are sold under licensed brand names and they have over 50 private-label brands in grocery stores nationwide. DF delivers their products via one of the most extensive direct store delivery (DSD) systems in the U.S.

What led you to take a position?

We actually owned DF several years ago and then sold the position. The catalyst for the sale was the divestiture of WhiteWave Foods Co. (NYSE:WWAV) in July of 2013. From a fundamental standpoint some of the same pricing concerns, intense competition, and inflationary concerns were swirling around the company as they are now. Ironically enough, talks of another potential acquisition also recently surfaced with a report in October of Hongsheng Beverage being potentially interested in buying DF.

Your investment decision-making process involves being value or growth agnostic – what value and growth qualities does DF have?

In our opinion, the greatest advantage of being style agnostic is that it allows you to scan the entire universe for companies and also avoid any preconceived biases. Albeit possibly warranting an entire discussion on its own…the value versus growth debate will always remain, but in general we believe value stocks will outperform over longer periods of time. There is of course always a reversion to the mean but 2016 has clearly seen value trounce growth.

DF just released its third quarter earnings and from a growth perspective it continues to perform well. The company actually has a healthy long-term earnings growth rate of 12%. From a valuation perspective, we believe this is where DF should attract some attention. We believe the company was extremely undervalued in August and early September and even after about a 31% bump since then, we think the stock has much more upside. S&P Capital IQ currently has a fair value calculation of $26 for DF.

Continue reading

March Madness: Final Four Investing Bracket 2016

March MadnessDear Mr. Market:

The entertainment and shock value you provide us with the stock market might meet its match over the next few weeks. Are you ready for some surprises and wild finishes? That’s what March Madness brings each and every year! It’s also an opportunity to take a high level view of the current investment environment with what lies ahead.

Six years ago we became the first Registered Investment Advisor to use the NCAA basketball tournament as a way to show our readers a forward-looking view on the stock market. We break down and assign each of the four “regions” with an asset class and then pick teams (companies) that we think have the best chance at doing well relative to others.

This year we will dive right into our investing bracket looks and how we think the remainder of 2016 will play out.

Click here to see the entire bracket.

To set the table let’s take a quick moment to recall last year and the undefeated Kentucky team. They came into the Final Four 38-0 and were a virtual lock to win it all but as you may remember the Wisconsin Badgers shocked everyone and provided the surprise millions of fans tune in for every year! This type of “upset” is exactly how we think 2016 will pan out in the Large Cap asset class.

Large Cap

Five years from now people will look back at 2015 as a year that the stock market extended its bull market run for one more year. Investors will exhibit a short-term memory lapse and forget that it actually was a very rough year with heightened volatility, the first correction, and a market that actually turned in negative numbers if you looked “under the hood”. The problem is…most people will not remember this and only look to see the S&P 500 finished positive +1.38%.

Without the “FANG” stock phenomena, however, 2015 would have been very negative. In other words, Continue reading

MPG Core Tactical 60/40: May 2015 Performance Update

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Dear Mr. Market:

If you’re new to this monthly series…remember what we’re doing. This exercise, as we like to call it, is not an attempt to pick the best stock or “time the market”. We leave that futile task to those who own time machines and If you’re new to this monthly series…remember what we’re doing. This exercise, as we like to call it, is not an attempt to pick the best stock or “time the market”. We leave that futile task to those who own time machines and accurate crystal balls. For a refresher, see our first article on the MPG Core Tactical 60/40 portfolio.

Here’s the current summary of the MPG Core Tactical 60/40 portfolio mix, which is updated as of this writing (June 5, 2015).

Click here to compare the portfolio against the benchmark

What adjustments did we make?

We didn’t make any portfolio moves in May. Aside from collecting nice dividends through BND, LQD, and Conoco Philips (COP), the market environment did not warrant making any adjustments.

Why? Continue reading

Dividend Investing … are you chasing yields?

Chasing DividendsDear Mr. Market:

With interest rates at rock bottom levels many investors have gravitated to dividend yielding stocks over the last several years. Money markets, certificates of deposit and bonds simply are not delivering the rates that investors are looking for or have come to expect. It has left investors looking for other options to generate the income that they are counting on but what are the long-term ramifications? Are investors chasing yields with the risk of digging themselves into a deeper hole? What should investors look for and how can they manage their portfolios effectively?

It doesn’t take much effort to find a laundry list of stocks with very attractive yields. In fact if you simply run a screener on Google it will return a list of nearly 100 stocks that offer a yield of 10% or more! With the stock market continuing its upward trend investors have been moving to these stocks chasing the yields with little attention being paid to the underlying stock and the associated risks.

Before we jump into specific companies and industries let’s make sure we are all on the same page and understand what dividends are. Continue reading