An Insider Is Bullish About This Consumer Goods Company

Meena is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.

A filing with the SEC has disclosed that the wife of Timothy Smucker bought 1,000 shares of J.M. Smucker (NYSE: SJM) on June 21 at an average price of $101.05 per share. Smucker is the chairman of the company’s Board of Directors -- he owns over half a million shares of the company directly -- and so, this transaction had to be reported to the SEC as an insider purchase.

We track insider purchases because these moves increase an individual’s exposure to the company, and so, should signal more confidence than usual in the stock (otherwise it would be more rational to diversify). Studies do show a small outperformance effect for stocks bought by insiders (read our analysis of studies on insider transactions). As such, we like to briefly cover insider purchases so that investors can do further research on any interesting stocks.

J.M. Smucker’s fiscal year ended in April 2013. The company recorded a 7% increase in sales compared to the previous fiscal year, and with margins improving, its earnings grew 18%. In fiscal Q4, the rise in net income was even stronger, but on the flip-side, this growth came entirely through margin improvements as sales actually fell 1%.

Currently, J.M. Smucker trades at 20 times its trailing earnings; investors have been bidding up even fairly stagnant food companies into a similar valuation range, and even with analysts expecting further growth in EPS over the next two years, the forward P/E is 16. Smucker is something of a defensive stock -- its beta is 0.4 -- and while its pricing is high, the company has at least shown some ability to grow its business.

We not only track insider activity, but also follow quarterly 13F filings from hundreds of hedge funds as part of our work developing investment strategies; we have found, for example, that the most popular small cap stocks among hedge funds generate an average excess return of 18 percentage points per year. Looking through our database, we see that billionaire David Harding’s Winton Capital Management disclosed ownership of about 280,000 shares of J.M. Smucker as of the end of March (check out Harding's stock picks).

Other food companies include Campbell Soup (NYSE: CPB), Kellogg (NYSE: K), ConAgra Foods (NYSE: CAG), and Mondelez International. Campbell and Mondelez feature trailing earnings multiples in the 18-19 range, quite close to where J.M. Smucker trades -- their forward P/Es are also in line with what we saw at that company. Each of these stocks also feature a beta of 0.5 or lower, making them competitive from a defensive perspective as well.

However, their bottom lines have not been holding up as well. Specifically, Campbell Soup experienced a 2% increase in earnings last quarter compared to a year ago, despite significantly higher sales growth, while Mondelez’s operating income declined (earnings results aren’t quite comparable due to the breakup of what was Kraft Foods).

Kellogg and ConAgra are in a more complex position from an earnings perspective: they carry forward P/Es of 15 and 13, respectively, making them priced about even to slightly lower than the other three companies we’ve discussed here, but those figures depend on significant improvement in their businesses given that their valuation represents a steep premium over their peers.

Once again, these companies are somewhat insulated from the broader economy, with betas in the 0.4-0.5 range, and they both offer dividend yields of about 3% as well. Revenue has been rising at double-digit rates for both Kellogg and ConAgra, going by recent quarterly reports, but at least thus far, earnings have been down and management would have to reverse that to put these companies on track towards their peer group.

We like that over the past year J.M. Smucker has generally been able to increase both its revenue and net income, but we would be a bit concerned about sales results in its most recent quarter. While growth seems generally high enough that it might be able to justify its current valuation, the company is dependent on an expanding business and any sign that might not occur would be reason enough to avoid the stock.

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This article is written by Matt Doiron and edited by Meena Krishnamsetty. They don't own shares in any of the stocks mentioned in this article. The Motley Fool has no position in any of the stocks mentioned. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. Is this post wrong? Click here. Think you can do better? Join us and write your own!

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