Sanderson Farms: Dreman-Style Contrarian Buy

09/25/2017 5:00 am EST

Focus: STRATEGIES

John Reese

Founder and CEO, Validea.com And Validea Capital Management

John Reese, editor of Validea, assesses stocks based on the known investing criteria of the stock market's most legendary investors. Sanderson Farms (SAFM) earns a 100% rating based on the contrarian investor strategy of David Dreman.


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Sanderson Farms is engaged in the production, processing, marketing and distribution of fresh and frozen chicken, and also preparation, processing, marketing and distribution of processed and minimally prepared chicken. Below are some of the criteria we assess based on David Dreman's contrarian strategy:

MARKET CAP: PASS

Medium to large-sized companies (the largest 1500 companies) should be chosen, because they are more in the public eye. Furthermore, the investor is exposed to less risk of "accounting gimmickry," and companies of this size have more staying power. SAFM has a market cap of $3,407 million, therefore passing the test.

EARNINGS TREND: PASS


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A company should show a rising trend in the reported earnings for the most recent quarters. SAFM's EPS for the past 2 quarters, (from earliest to most recent quarter) 2.98, 5.09 have been increasing, and therefore the company passes this test.

EPS GROWTH RATE IN THE IMMEDIATE PAST AND FUTURE: PASS

This methodology likes to see companies with 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.

SAFM passes this test as its EPS growth rate over the past 6 months (399.01%) has beaten that of the S&P (19.60%). SAFM's estimated EPS growth for the current year is (52.93%), which indicates the company is expected to experience positive earnings growth. As a result, SAFM passes this test.

P/E RATIO: PASS

The P/E of a company should be in the bottom 20% of the overall market. SAFM's P/E of 12.02, based on trailing 12 month earnings, meets the bottom 20% criterion (below 13.08), and therefore passes this test.

CURRENT RATIO: PASS

A prospective company must have a strong Current Ratio (greater than or equal to the average of it's industry [1.15] or greater than 2). This is one identifier of financially strong companies, according to this methodology. SAFM's current ratio of 3.91 passes the test.

RETURN ON EQUITY: PASS

The company should have a high ROE, as this helps to ensure that there are no structural flaws in the company. This methodology feels that the ROE should be greater than the top one-third of ROE from among the top 1500 large cap stocks, which is 17.04%, and would consider anything over 27% to be staggering. The ROE for SAFM of 21.96% is high enough to pass this criterion.

PRE-TAX PROFIT MARGINS: PASS

This methodology looks for pre-tax profit margins of at least 8%, and considers anything over 22% to be phenomenal. SAFM's pre-tax profit margin is 13.42%, thus passing this criterion.

LOOK AT THE TOTAL DEBT/EQUITY: PASS

The company must have a low debt to equity ratio, which indicates a strong balance sheet. The Debt/Equity ratio should be less than 20% or less than the industry average. SAFM's Total Debt/Equity of 0.00% is considered exceptional.

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