NEW YORK ( TheStreet) -- If you were to assign human characteristics to the stock market -- reasonable since it is the sum of its participants' thinking -- it's an idiot savant. Unbelievably skilled at ferreting out (and punishing) greed and less than reasoned speculation, but then at times missing the writing on the wall.
When that happens, it takes an outsider to come in and show the market what it is missing. One such moment happened on Valentine's Day this year, when Warren Buffett announced he would acquire food company H.J. Heinz (HNZ) with 3G Capital for $72.50 a share.
Just before the deal was announced, HNZ was trading at $60.48, or about 17 times the April 2013 consensus earnings per share forecast of $3.55. Buffett's $72.50 bid valued the company at 20.4 times the forecast.
I don't know what Buffett's thesis is per se, but his valuation estimate is interesting and instructive. Specifically, since he doesn't chase companies that lose money and he only invests in companies that generate increasing amounts of cash over time, I think he's posited, and put his money where his posit is, that money can be made today and in the future by paying $20 for a dollar of earnings.Buffett's speculation has been well digested in the market since there has been an across-the-board jump in the multiple for food companies, as the chart below demonstrates. Since demand for food will never, ever go away, I recommend taking a look at the food companies listed above, and initially nibbling at them. I say nibbling because I feel food companies still offer good value today, but given the volatile, jumpy nature of our markets I feel additional entry points will present themselves. Another by-product of dealing in the most necessary of all products is that food companies tend to throw off a lot of cash. For instance, sticking with General Mills (GIS) for the moment, the company has been a stellar dividend payer and grower. Right now the yield is a healthy 3.1%.
More important, over the past 10 years GIS has grown its dividend from 55 cents per share to the current $1.55 share, for a very heady compound annual growth rate of 10.7%. Similarly, J.M. Smucker Company (SJM), yielding 2.1%, has also grown its dividend by 10.7% over the past 10 years, far outpacing inflation. Below are the food companies we like, with the associated earnings date in case you want to tune in. Note Kimberly-Clark (KMB), which released earnings Friday showing higher profit and also raised its forecast.
(GIS), June 26
Procter & Gamble
(PG), April 24
(KMB), April 19
(KRFT), May 2
(K), May 2
(HSY), April 25
(SMJ), June 6
Dr Pepper Snapple Group
(DPS), April 24
Green Mountain Coffee Roasters
(GMCR), May 8
(DF), May 9
Select the service that is right for you!COMPARE ALL SERVICES
Jim Cramer and Stephanie Link actively manage a real portfolio and reveal their money management tactics while giving advanced notice before every trade.
- $2.5+ million portfolio
- Large-cap and dividend focus
- Intraday trade alerts from Cramer
- Weekly roundups
Access the tool that DOMINATES the Russell 2000 and the S&P 500.
- Buy, hold, or sell recommendations for over 4,300 stocks
- Unlimited research reports on your favorite stocks
- A custom stock screener
- Upgrade/downgrade alerts
Jim Cramer's protege, David Peltier, identifies the best of breed dividend stocks that will pay a reliable AND significant income stream.
- Diversified model portfolio of dividend stocks
- Alerts when market news affect the portfolio
- Bi-weekly updates with exact steps to take - BUY, HOLD, SELL
All of Real Money, plus 15 more of Wall Street's sharpest minds delivering actionable trading ideas, a comprehensive look at the market, and fundamental and technical analysis.
- Real Money + Doug Kass Plus 15 more Wall Street Pros
- Intraday commentary & news
- Ultra-actionable trading ideas
Our options trading pros provide daily market commentary and over 100 monthly option trading ideas and strategies to help you become a well-seasoned trader.
- 100+ monthly options trading ideas
- Actionable options commentary & news
- Real-time trading community
- Options TV