Drama. The stock market doesn’t seem to care too much for good food, and we only hear about it if there’s a takeout event and they might get a “free lunch”.
So, to much fanfare today, Citigroup “initiated” their coverage of food in groceries with WalMart (Neutral, $76 today with a price target of $83), Target (Neutral, $62 today to go to $66) and Costco – Buy at $126 with a price target of $150 – because “Costco has exposure to high-income customers the others lack”, they say (The Street, September 15, 2014, Citigroup Initiates Costco, Walmart & Target With Clear Favorite).
These pronouncements suggest to us that the market only likes really “fast food” (and maybe “darts” to go with it) because we don’t get any hint of what to do when these companies hit their “targets” – should we sell them then – or when might they do that?
We are left to wonder if Thanksgiving is too soon, or must we wait for Christmas? Is +10% on WalMart not worth picking-up, but +20% on Costco is? And why are the high-income customers at Costco different from the high-income customers at Whole Foods which tanked (-30%) this year (The Street, September 15, 2014, Jim Cramer on Grocery Stocks: Whole Foods Is Easy to Swallow)?
We just don’t know, but being “foodies” ourselves, we decided to “check it out”, so to speak; please see the Fundamentals below.
Exhibit 1: (B)(N) Good Food For Thought – Fundamentals
As a portfolio, these companies gained +16.5% last year, but are off minus (2.3%) so far this year.
The stop/loss (green line in Figure 1.1 on the left), has also kept us in cash a lot of the time, although we do use the profits to buy them back if they’re still trading above the price of risk, and we usually have lots of time to think about that.
On a portfolio basis, they’re all (B)-class at the present time, except for Whole Foods (which, we find below, is “fairly” priced at the present time); please click on the links (and again to make them larger if required) “(B)(N) Good Food For Thought – Prices & Portfolio and Cash Flow Summary” for further details.
It could be just us – and probably is – but we think that it’s impertinent to forecast a stock price, or a target for a stock price, because there is no known connection between a company and its stock price – there are as many reasons for a stock price as there are investors and their money – and nothing is known about stock prices, other than what they are.
The best that we’re able to do is calculate the price of risk which demonstrates a Nash Equilibrium between “risk seeking” and “risk averse” investors – and there’s not that much difference between them – but we can also show that the price of risk separates the market into the (B)-class companies, and its complement in that market, the (N)-class companies, and that we can protect our prices in the (B)-class companies, but a takeover price, or zero, is generally the bottom-line for the (N)-class companies (of which Whole Foods is one, at the present time).
Hence, for us, the price of risk is “the” stock price – the only one that matters – and, with reference to Figure 1.2 above, Costco is currently trading above it – which is the only reason that it is in our portfolio and, obviously, we can afford to relax the volatility-based stop/loss, but we can’t afford to take it away entirely because, for us, the bottom-line is the greater of the stop/loss and the price of risk – which is our price of risk – but investors might have some other idea.
For example, Citigroup thinks that Costco, which has the highest [P/E] at 27×, and a dividend yield of 1.2% at the current price, and needs to turn over its inventory twice as frequently as WalMart to make earnings, and has bespoke customers to pay for it all, is a good idea, and WalMart and Target are less so, and Whole Foods is off their charts – OK, but we’re not so sure about that, and on balance, based on the nearly hand-to-mouth price volatility, and the “fragility” of the prices that are demonstrated in Figure 1.2 above, investors aren’t either and “price targets” don’t mean anything if there’s no consensus, or meeting of the minds; please see below.
Arbitrage Pricing For Good Food
The Theory of the Firm provides additional information about stock prices because companies that are in the same industry are likely to have similar challenges – even though they might address them differently – and their trading connections are, therefore, similar in substance or kind – the same or similar people and companies.
The company’s inventory and fixed assets (net plant and equipment) are what the company “owns” (even if they are in debt for it), but to get any value from it, the company needs to engage its “trading connections” which include not only its employees and its “process”, but also its customers, suppliers, bondholders, banks, and shareholders, and the “worth” of that is measured by the Coase Dividend (GW*) and the “worth” of the “shareholders equity” (N) is measured by N*=”Accumulated Depreciation” + GW* + “Inventories” + “Net Plant and Equipment”, which we call the “factors of production” and where we have “quoted” the elements because they are, for the most part, similar to the accounting meanings, but not always exactly the same (please see our Post “(P&I) The Banker’s Modality” for an example of that distinction) and the Theory of the Firm requires that we add them.
Hence, because $1 of the Coase Dividend measures the same thing for each of these similar companies, we can detect arbitrage opportunities if the market price of the Coase Dividend is different for different companies with similar “risk factors” which are the Enterprise Risk = 1 + log(N/N*) associated with the market value of the Coase Dividend as Coase Dividend (Risk) = 1 + log(Market Value/GW*), and the Dividend Yield = 1 + log(Dividends/Market Value) against the Dividend Risk = 1 + log(Dividends/Earnings), which is the payout rate against “earnings” if they are positive, or a nominal (but meaningful) 1 if the earnings are negative; please see Exhibit 2 below.
Exhibit 2: Enterprise Risk and Dividend Risk in Good Food For Thought
For more information on the chart elements and the “Five Equations of State”, please see our recent Post, “(B)(N) Through The Looking-Glass“.
And for more information on real “risk management” in modern times and additional references to the theory and how to read the charts and tables, please see our Post, The RiskWerk Company Glossary and “(P&I) Dividend Risk and Dividend Yield“, and our recent Posts “(P&I) The Profit Box” and “(P&I) The Process – In The Beginning“; and we’ve also profiled hundreds of companies in these Posts and the Search Box (upper right) might help you to find what you’re looking for, such as “(B)(N) TLM Talisman Energy Incorporated” or “(B)(N) ATHN AthenaHealth Incorporated” or “(B)(N) PETM PetSmart Incorporated“, to name just a few.
And for more applications of these concepts please see our Posts which rely on the Theory of the Firm developed by the author (Goetze 2006) which calibrates The Process to the units of the balance sheet and demonstrates the price of risk as the solution to a Nash Equilibrium between “risk-seeking” and “risk-averse” investors within the demonstrated societal norms of risk aversion and bargaining practice. And for more on The Process, please see our Posts The Food Chain and The Process End-Of-Process.
And for more on what risk averse investing has done for us this year, please see our recent Posts on “(P&I) The Easy (EC) Theory of the Capital Markets” or “(B)(N) The Easy (EC) Theory of the S&P 500“, and the past, The S&P TSX “Hangdog” Market or The Wall Street Put or specialty markets such as The Dow Transports & Utilities or (B)(N) The Woods Are Burning, or for the real class action, La Dolce Vita – Let’s Do Prada! and It’s For You, Dear on the smartphone business.
And for more stocks at high prices, The World’s Most Talked About Stocks or Earnings Don’t Matter – NASDAQ 100. And for more on what’s Working in America, Big Oil, Shopping in America or Banking in America, to name just a few.
We are The RiskWerk Company and care not a jot for mutual funds, hedge funds, “alternative investments”, the “risk/reward equation” and every other unprovable artifact of investment lore. We have just one product
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Investing in the bond and stock markets has become a highly regulated and litigious industry but despite that, there remains only one effective rule and that is caveat emptor or “buyer beware”. Nothing that we say should be construed by any person as advice or a recommendation to buy, sell, hold or avoid the common stock or bonds of any public company at any time for any purpose. That is the law and we fully support and respect that law and regulation in every jurisdiction without exception and without qualification to the best of our knowledge and ability. We can only tell you what we do and why we do it or have done it and we know nothing at all about the future or the future of stock prices of any company nor why they are what they are, now. The author retains all copyrights to his works in this blog and on this website. The Perpetual Bond®™ is a registered trademark and patented technology of The RiskWerk Company and RiskWerk Limited (“Company”) . The Canada Pension Bond®™ and The Medina Bond®™ are registered trademarks or trademarks of the Company as are the words and phrases “Alpha-smart”, “100% Capital Safety”, “100% Liquidity”, ”price of risk”, “risk price”, and the symbols “(B)”, “(N)” and N*.