Guru Plays on the Chicken and the Egg

12/18/2015 7:00 am EST


John Reese

Founder and CEO, And Validea Capital Management

John Reese, editor of Validea, selects stocks based on the investing strategies of legendary investors. Here, he looks at a poultry play that scores highly on the Ken Fisher model and an egg producer that scores highly on the David Dreman model.

Our recommendation for Sanderson Farms (SAFM) is based on the price to sales strategy of Kenneth Fisher; the stock earns a 100% rating on our Fisher model.

The company is a poultry processing company, which is engaged in the production, processing, marketing, and distribution of fresh and frozen chicken and other prepared chicken items.

The prospective company should have a low price:sales ratio. SAFM's P/S of 0.55 based on trailing 12-month sales is below 0.75, which is considered quite attractive.

Meanwhile, less debt equals less risk according to this methodology. SAFM's Debt/Equity of 0.98% is acceptable, thus passing the test.

The prospective company should also have a low price:sales ratio. Price:sales ratios below .75 are tremendous values and should be sought.

SAFM's P/S ratio of 0.55 is below 0.75, which is considered extremely attractive. It passes this test with flying colors.

This methodology looks for companies that have an inflation adjusted EPS growth rate greater than 15%. SAFM's inflation adjusted EPS growth rate of 16.60% passes the test.

This methodology also looks for companies that have positive free cash per share. Companies should have enough free cash available to sustain three years of losses. SAFM passes this criterion.

This methodology also looks for companies that have an average net profit margin of 5% or greater over a three-year period. SAFM, whose three-year net profit margin averages 5.37%, passes this evaluation.

Cal-Maine Foods (CALM) scores an 86% rating on our contrarian investor strategy based on David Dreman. Cal-Maine is a producer and marketer of shell eggs in the United States.

Under this strategy, a company should show a rising trend in the reported earnings for the most recent quarters. This methodology also likes an EPS growth rate higher than the S&P in the immediate past and a likelihood that this trend will continue in the near future. CALM passes this test.

The P/E of a company should be in the bottom 20% of the overall market. CALM's P/E of 9.74, based on trailing 12-month earnings, meets the bottom 20% criterion (below 12.09) and therefore passes this test.

A prospective company must have a strong current ratio, a low payout ratio, a low debt-to-equity ratio and a high return on equity The company passes all of these tests.

This methodology looks for pre-tax profit margins of at least 8% and considers anything over 22% to be phenomenal. CALM's pre-tax profit margin is 23.20%, thus passing this criterion.

The company in question should have a yield that is high and that can be maintained or increased. CALM's current yield is 3.76%, while the market yield is 2.71%. CALM passes this test.

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