TLValuation and security selection important
Meryl Witmer, general partner at Witmer Asset Management, LLC, concedes that the stock market is expensive and that opportunities may be scarce. She also does not see a driver that will determine market’s direction, either up or down, through year-end. A sideways market for 2014 is probable.
Witmer, however, picks stocks based on their valuation and growth prospects irrespective of the macro outlook. She indicated that she purchases stocks cheaply relative to their true value in the June 14, 2014 issue of Barron’s. Her track record has been impressive enough for Warren Buffett to offer her a seat in the Berkshire Hathaway board last year. According to pundittracker.com, Witmer’s predictions have been more profitable than taking the consensus view. Out of the 56 picks Witmer made since 2002, 32 were accurate. Investing in her stock picks would have generated a 115% cumulative return from 2002 to 2013.
In August, Mohnish Pabrai took part in Brown University's Value Investing Speaker Series, answering a series of questions from students. Q3 2021 hedge fund letters, conferences and more One of the topics he covered was the issue of finding cheap equities, a process the value investor has plenty of experience with. Cheap Stocks In the Read More
Witmer: Two picks focused on supplying specialty ingredients
Witmer sees upside potential for two stocks: Ingredion Inc (NYSE:INGR) and Tate & Lyle PLC (LON:TATE) (OTCMKTS:TATYY). Both companies manufacture sweeteners and starch primarily, and they supply consumer-oriented companies such as food, beverage and brewing. Ingredion and Tate also supply raw material to paper, pharmaceutical, clothing, and animal feed companies.
Ingredion and Tate separate starch-based materials, such as corn, rice, tapioca and potatoes, into their components. Particularly for corn, Ingredion Inc (NYSE:INGR) and Tate & Lyle PLC (LON:TATE) (OTCMKTS:TATYY) break down corn into kernel, protein and fat components. The non-kernel parts are sold with further processing. After that is completed, a starch slurry remains. Such material is extremely flexible and has many uses that include:
- Core uses:
- Cornstarch in food
- Enhance and bind processed foods
- Drug tablet ingredient
- Make recycled paper stronger
- Ingredient in fabric softeners
- Specialty uses: Focused on food industry
- Fat replacement
- Fiber additive
- Enhance foods with texture
The industry is structured like an oligopoly; new entrants will need at least USD $1 billion in capital just to start one wet-milling plant. The main players include Ingredion Inc (NYSE:INGR) , Archer Daniels Midland Company (NYSE:ADM), NYSE:CAGConAgra Foods Inc (NYSE:CAG) and Tate & Lyle PLC (LON:TATE) (OTCMKTS:TATYY).
Witmer prefers Ingredion and Tate & Lyle
Witmer prefers Ingredion Inc (NYSE:INGR) , and Tate & Lyle PLC (LON:TATE) (OTCMKTS:TATYY), as both companies focus on specialty uses of ingredients. Such uses help food sellers enhance nutritional content in food and label products accordingly. Ingredion and Tate are best positioned to benefit from demand for additives that allow manufacturers to label products good source of fiber, low glycemic, G.M.O. free and gluten free. Consumers are demanding more nutritionally dense and less sugary products, and food manufacturers are eager to meet such need. Specialty additives also have a higher profit margin, 25%, relative to core products with a margin of 16%. The specialty additives are customized to each product. Customization lends itself for long term customer relationships resulting in steady cash flows. Other analysts including Chuck Carnevale, creator of F.A.S.T. Graphs™, and Robert Moskow from Credit Suisse agree with Witmer’s view on Ingredion.
Ingredion’s sales mix (source: Ingredion’s 2013 annual report)
Tate and Lyle generate the majority of profits from specialty ingredients (source Tate and Lyle’s 2013 annual report)
Witmer’s price target for Ingredion Inc (NYSE:INGR) ranges from $91-$100 and earnings are driven by a steady core business together with competent management of raw material costs. Ingredion is trading at around $75. Regarding Tate & Lyle PLC (LON:TATE) (OTCMKTS:TATYY), Witmer expects the stock to rise to $880 pence from its current price of $682 (as of June 16, 2014). Another plus for Tate is a 4% dividend yield.