Two deep-value stocks for couch potatoes
With the Olympic Games in full swing, Trading Strategies awards gold medals for some terrific picks over the last year. In December 2011, Lance Helfert said P.F. Chang's was one of the better restaurant stocks, and it promptly climbed nearly 66% until agreeing to be bought out in May 2012, making for a great call. Let's take a look at what Helfert likes this month.
MONTECITO, Calif. (MarketWatch) -- Investors can feel less guilty about vegging out this summer by purchasing shares of
Molson Coors is best known for its flagship Coors Light brand, but many investors don't realize that the company owns a robust portfolio of multi-national brands and a 42% interest in MillerCoors, a joint venture that was created in 2008 by merging the U.S. operations of Molson Coors and SABMiller. In addition, the company recently expanded its European footprint by acquiring StarBev for $3.5 billion.
Beer isn't the only thing that has been bubbling at Molson Coors. Over the past eight years, its dividend has tripled. At $41 per share, the stock yields 3.1%, and it is a bargain at 11 times earnings and eight times EBITDA, offering the potential to double if the company becomes an acquisition target. Molson Coors itself paid 11 times EBITDA for StarBev, and larger transactions in the industry have recently fetched even bigger multiples.
After Anheuser-Busch was acquired for 13 times EBITDA in 2008, its successor, Anheuser-Busch InBev, agreed in 2012 to pay 15 times EBITDA for the other half of Grupo Modelo that it did not already own, and SABMiller acquired Foster's Group in 2011 for 14 times EBITDA.
On the other side of the couch, Diamond Foods provides a number of delicious salty snacks that are often enjoyed with the beers mentioned above. Its key products include Kettle Brand potato chips, Emerald nuts and Pop Secret popcorn, not to mention the well-recognized Diamond of California culinary nuts brand.
Diamond's shares fetched $96 less than a year ago pending the company's acquisition of Pringles from Procter & Gamble, which ultimately fell through. The acquisition failed as a result of an internal investigation which found that its payments to nut growers of $20 million in 2010 and $60 million in 2011 were accounted for in the wrong fiscal periods, inflating the company's earnings.
Commenting on this chain of events, David Einhorn's Greenlight Capital wrote to its investors, "Imagine our surprise when DMND announced that its own audit committee had actually investigated, found the wrongdoing, restated earnings and dismissed the management. This sort of self-policing happens too infrequently, and we think it deserves to be noticed and applauded."
The botched Pringles deal followed by the removal of Diamond's top executive officers sent the company's shares into a tailspin, which landed the stock at a low of $17. Diamond recently hired a new CEO and secured a $225 million investment from Oaktree Capital Management to shore up its balance sheet. The company is currently in the process of restating its financial statements to reflect its payments to walnut growers in the appropriate fiscal periods. In addition, it has a hearing scheduled with the Nasdaq on July 26 to request an extension to hold its annual meeting of stockholders and a stay of de-listing its stock until it completes its financial restatements.
Warren Buffett, the world's greatest investor, has a simple rule that dictates his buying: "Be fearful when others are greedy, and greedy when others are fearful." Investors are certainly fearful of the uncertainty surrounding Diamond's financial restatements, as evidenced by an incredibly high short-interest representing nearly 50% of the company's shares outstanding, but this makes it all the more attractive at its current enterprise value of only 1x sales.
After adjusting for its debt, Diamond shares could fetch triple their current price if the company regains a multiple comparable to its peers, and its brands have far more growth potential than most. Pringles, for example, was recently acquired for $2.7 billion, which equates to 1.8x sales, and this product has already achieved market saturation. To put this in perspective, the market capitalization of Diamond Foods is $400 million and its entire enterprise value is only $1 billion. Which would you rather own?
For these reasons Diamond is likely to attract the attention of private equity and strategic acquirers, such as Kellogg (K) , which ended up acquiring Pringles and whose CEO recently stated that Diamond is "clearly a fit in the portfolio," and that "you could say our ability to do bolt-on acquisitions has probably expanded with the addition of this business [Pringles]."
Diamond's brands have continued to perform well during the company's turmoil, with its key brands gaining market share in recent months. Its board of directors has exceptional depth for a company of Diamond's size and is certainly capable of restoring and creating value for shareholders. So grab an ice cold beer and a bag of all-natural potato chips and enjoy these stocks while supplies last.
Disclosure: West Coast Asset Management (WCAM) clients currently own shares of
Lance Helfert is the President and co-founder of and co-author of "The Entrepreneurial Investor: The Art, Science and Business of Value Investing."
, 
, 
, Copyright ©2013. All rights reserved.