Breakfast Bets: Cal-Maine & JM Smucker

09/14/2016 10:00 am EST


Peter Mantas

CIO, Logos LP

Peter Mantas is a value-focused, long-term investor and money manager with Toronto-based Logos LP. Here, we discuss two leading food-related stocks, which both also happen to be long-standing family-run businesses.

Steve Halpern:  Joining us today is Peter Mantas, money manager at Logos LP, a value-oriented firm based in Toronto.  How are you doing today, Peter?

Peter Mantas:  I'm good, Steven.  How are you?

Steve Halpern:  Very good.  Thanks for taking the time.  First, could you tell our listeners a little about the background of Logos, LP and your underlying investment strategy?

Peter Mantas:  Sure.  Logos, LP operates under a quality at a discount investment strategy.  We're essentially a pure alpha fund, where we try to look for names of the highest true non-invested capital, but have some sort of catalyst or opportunity, whether that be at the present share price or a specific event that is happening to it or macroeconomic event that makes the investment compelling.  

The strategy is also centered around having core investment hype, names that we hold on for dear life, as I like to say, and peripheral investments as well that capture the upside in bull markets, but also limit the downside when we're in bear markets.

Steve Halpern:  At the upcoming Toronto MoneyShow, you'll be conducting a workshop on a very specific type of investment -- focused on stocks of businesses that are family run.  Could you first explain how or what the parameters are of a family-run business and also maybe touch on the pros and cons of investing in this type of company?

Peter Mantas:  Sure.  We researched a lot on this, and essentially we look for names that are 20% owned by a family or a founder and also have family members on the board or in management.  

What we found through our research is that the percentage of outperformance versus the broader market for these family-owned firms is quite drastic, anywhere from 4% to 7% per year, which over time and compounding pretty drastic out-performance.  

Some of the pros and cons of investing in some of these firms are as follows: The first is they're generally -- actually, one of the pros is a con.  They're generally-discounted by the market more frequently because they don't have a lot of the typical investment banking pedigree that a lot of these banks look for.

And so they may have depressed share prices for a longer period of time versus non-family-owned businesses.  

But at the same time the pro is that they surprise more to the upside during earnings from one study we found, which over time really allows for out-performance over the long run.  

Steve Halpern:  Now, let's turn to a couple of companies in particular that fall into this category; and one firm is Cal-Maine Foods (CALM).  What's the story here?

Peter Mantas:  Cal-Maine was started I think it was in the 1930s, 40s -- and it's run by Adolphus Baker right now -- it's been family run since then, and the family trust owns the biggest stake in the company.  

Cal-Maine Foods essentially is the largest egg producer in the United States. They've done very well the past 15 years.  The thing has done I think 2000%, some very, very good return.

But recently the major catalyst was that there was fear of avian flu, which created an uptick in egg prices, but that was unfounded, and so there's been a massive decrease in egg shell prices.  

But according to studies I've been reading and research, eggs have been still fairly strong and prices still expected to rise on a supply and demand basis.  We feel that the drop in the share price due to the price of eggs had been over-done.  The company has no debt, which is also very remarkable.  

Given the fact that this is a market share play in the instance that is considered a stable that is growing over time and will continue to grow over time per decade it creates an attractive buying opportunity at current levels since the stock has tumbled in 2016.

Steve Halpern:  Another firm that fits under the family-owned umbrella also happens to be another food company, and that's JM Smucker (SJM). What's the attraction in this situation?

Peter Mantas:  JM Smucker's had a really good year.  We were interested in it a year and a half ago when things were not so good.  The basic goal for JM Smucker is they would like to own the “breakfast of the American household”.

That includes getting into the coffee market, expanding the jam market, getting into the “Uncrustables” or the peanut butter and jam market for school for children as well as other goods and easily consumed items that you could find like pickles and beets.  

The real key here is that they had a recent problem with their take-up last year, there was lower than expected growth, but they turned that around.

Coffee has now become a growth leader for them.  Their recent acquisition of Big Heart Pet Brands, their dog food from the acquired has also been leading a tremendous amount of growth.  

The overall story for them is continued efficiencies in their current product portfolio with peripheral investments added to that growth.  This company has done very well with that strategy over the last 15 to 20 years.

So anytime that there is a decline of drastic proportions or major misses or a shifting pricing for the company's product, we start to get interested and look at the company but the fees and the startup vending points.

Steve Halpern:  Again, our guest is Peter Mantas of Logos, LP.  Thank you so much for your time today.

Peter Mantas:  Thank you so much.  

Editor's note: Peter Mantas and Matthew Castel of Logos LP will be featured speakers at the Toronto MoneyShow, offering a more in-depth analysis of equity outperformance by family-run business. Register for free here.

By Peter Mantas, Money Manager at Logos LP

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