Most of my portfolio is comprised of ETFs, but back in November, in addition to Nucor (NUE), I also decided to purchase Premium Standard Farms (PORK), a vertically integrated hog and meat processor. This one hasn’t fared as well as NUE, but honesty is honesty, so I’ll write about it here in case it’s helpful to anyone else.
PORK actually popped up several months before November on Valuedog, one of the quant screens I occasionally follow. They’re also occasionally spoken of by Motley Fool and other sorts of investment sites touting how the company’s unglamorous profile is often a key factor in finding undervalued stocks. After calculating Graham’s financial ratios and reading 10Ks and 10Qs just as I did for Nucor, I thought this stock looked ok overall. Now, this one was closer to what Graham defines as an enterprising rather than defensive value investment: it was quite new (an IPO from June 2005), it was quite small (less than the 2B market cap recommended for defensive investments), and some of its financial ratios did show red flags. On the other hand, management seemed to be forthright, earnings were solid and growing. When investing in a company like this, where commodities prices like soybeans and corn (for feed) and, of course, hog prices, affect margins incredibly, it’s always wise to follow reports on these markets as well. I found that Farmdoc, a publication by the University of Illinois Urbana-Champaign, put out regular, easy-to-understand reports every week and quarter that suited this purpose well.
I ended up buying PORK at $18. It proceeded to decline to $15 or so right after their September 2005 quarterly earnings announcement and only topped $18 again, for one day, last month. In retrospect, I know I’d gotten too eager to try to find something to invest in because I had screened and searched for such a long time before finding anything remotely close. I violated one of the cardinal rules of value investing: the principle of margin-of-safety, and bought the stock at its peak rather than at a discount.
In listening to the quarterly conference call for the September 2005 earnings release, I discovered that analysts were very unhappy with the fact that PORK’s management refused to disclose their hedging strategy because made it difficult for analysts to “forecast” future earnings. This really frustrated many of them. (I couldn’t help but wonder if it was a bit of shock for the company’s management as well to have to face such questions now that they were a public, rather than a private, company.)
The following quarter, a similar thing happened during the conference call. Management still simply refused to dislcose their hedging strategy, but this time analysts backed down a bit. PORK handily beat expectations that quarter. If it hadn’t, I wonder if analysts would have been as docile about the continued lack of disclosure. In fact, the stock price actually rose quite a bit after this quarterly announcement only because, as far as I could tell, PORK had beat analysts’ earnings expectations (by 52% according to Yahoo’s financial page) due to their hedging strategy.
As an investor, on the one hand, I respected that PORK’s management stuck to their principles, especially since their reasoning for not disclosing hedging strategies seemed reasonable: it was a competitive advantage they had over their competitors, and obviously, they didn’t want the whole world to know what they did. But, and this is probably the MBA side talking, I also wonder whether the “smarter” thing for management might be to find some way to placate analysts that wouldn’t also compromise their competitive strategy just so the stock price wouldn’t fluctuate as much.
In summary, here are the things I learned from this investment:
- Don’t be too eager to find something worth investing in. If there isn’t anything out there, buy an index or just wait instead of risking money.
- Don’t invest all at once: split the investment over at least a quarter to take advantage of a bit of dollar-cost averaging principles
- Analysts have a disproportionate influence on a stock’s price
And so I continue to hold my shares of PORK for now.