Looking for momentum, value? Consider chicken

JOHN DORFMAN


Not many stocks have momentum after a sour January. But a few stocks managed to eke out gains, and they are precious specimens to investors who believe the best time to buy a stock is when it's rising.

Twice a year I list some stocks that combine value (a stock price relative to per-share earnings) with momentum (better price action than average). For this column, I considered a stock to have momentum if it was up at least 1 percent in the past six months (when the S&P 500 was down 6.77 percent) and up at least a small fraction in January. I deemed it a value if it sells for 15 times earnings or less and had debt less than stockholders' equity.

Neither the value criteria nor the momentum criteria were very tough, in and of themselves. However, only 13 stocks met both.

Sanderson Farms: Among them, Sanderson Farms Inc. (SAFM) is my favorite. Sanderson is the third-largest U.S. chicken producer. Based in Laurel, Mississippi, it processes chickens at 11 plants, all of them in the South.

The average person in the United States now eats about 90 pounds of chicken per year. That's up from about 37 pounds per year 50 years ago, and the rise has been fairly steady. "A chicken in every pot," indeed. Over the same 50 years, consumption of beef has fallen from nearly 75 pounds per person to about 54 pounds.

Short sellers have been betting against Sanderson and other chicken producers. I believe they reason that bird flu will continue to afflict the companies, and that the companies will be unable to resist overproducing as they have periodically in the past.

Those are legitimate worries. But when you can own Sanderson shares for only nine times earnings, I believe the price already takes the risks into account.

Pilgrim's Pride: I also like Sanderson's big rival, Pilgrim's Pride Corp. (PPC), the largest U.S. chicken producer. The case for it is very similar to the case for Sanderson. But I see a shade of difference in the companies' balance sheets. Pilgrim's Pride at the moment has debt equal to 81 percent of stockholders' equity, while the figure for Sanderson is less than 1 percent.

Graco: From Minneapolis comes Graco Inc. (GGG), which makes fluid handling equipment — pumps, meters, mixers, sprayers and the like. This is the kind of prosaic business I love because if you buy the stock you are not paying a glamour premium. Most analysts rate the stock a mere "hold," but they have been raising their earnings estimates, which is usually a good sign.

Ennis: Ennis Inc. (EBF) was formerly known as Ennis Business Forms. These days, forms are usually computerized, but they are still at the heart of Ennis' business. The Midlothian, Texas, company has also diversified into related areas such as labels, point-of-sale advertising and T-shirt making. The stock has advanced 19 percent in the past six months, while the overall market fell. At 13 times earnings and less than 1.0 times sales, I think the stock is attractive.

First Solar: I've been wary of solar stocks because they depend on government subsidies, which could be yanked away.

However, First Solar Inc. (FSLR) attracts my attention. It has risen 55 percent in the past six months and yet sells for only 12 times earnings. The Obama administration has been a big solar proponent, and any successor Democratic administration probably would be too. On the Republican side, it depends on the candidate. So look for this stock to gyrate with the political winds this year.

The eight other stocks that passed the value-and-momentum screen were Amerisafe Inc. (AMSF), Arrow Financial Corp. (AROW), CBIZ Inc. (IASI), CNB Financial Corp. (CCNE), ePlus Inc. (PLUS), First Defiance Financial Corp. (FDEF), First Merit Corp. (FMER) and Super Micro Computer Inc. (SMCI).

This is the 28th column I've written (usually two each year) on stocks that combine value and momentum. On average, my selections have risen 16.1 percent in the year after publication, compared with 7.3 percent for the Standard & Poor's 500 Index.

Of the 26 columns for which one-year results can be calculated, 19 have been profitable and 17 have beaten the S&P.

My picks fell 3.2 percent last year, just edging out the S&P 500, which eased 3.3 percent.

Bear in mind that my column selections are theoretical and do not involve actual trades, trading costs or taxes. Past performance is not a reliable indicator of future results. And my column record shouldn't be confused with the results I achieve for clients.

Disclosure: I own Sanderson Farms shares personally and for most of my clients. I own Ennis shares for one or two clients.

John Dorfman is chairman of Dorfman Value Investments in Boston and a syndicated columnist. He can be reached at jdorfman@dorfmanvalue.com.

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