Stocks are expensive right now.
Let me re-phrase that…large-cap stocks are expensive right
According to John Hussman, head of the Hussman Investment Trust,
the S&P 500 currently sells for about 24 times earnings based
on 10-year average earnings. In his latest
, Mr. Hussman explains how he uses a cyclically adjusted measure of
PE that incorporates inflation to reach his conclusion that the
S&P 500 is overvalued.
According to his research, the only time that the broad market
sold for 24 times earnings was in 1929, 2000, and 2008. I'll let
you draw your own conclusions about entering the broad stock market
at such a valuation.
My point is: if we're going to find value right now, it's
probably not going to be in large-cap stocks.
*****So I recently found a small-cap agriculture stock that's
selling at an extremely cheap valuation of just 11 times trailing
That's inexpensive during any period, let alone during a time
when the broad stock market has rallied for over 20 months with
barely a breather.
I'm not saying it's time to bet against the broad market - I
wouldn't bet against a speeding train like this - but if you're not
buying value now then you're not setting yourself up for
The company in question is a Mexican poultry producer by the
Industrias Bachoco (
It's a $1.3 billion company, founded in 1953. It went public in
1997, and as a matter of policy, has paid an annual dividend of
about 20% of its net income every year except for in 2009.
Here's an excerpt on the company's dividend policy from their
annual report for fiscal year 2002:
"The Company has maintained as a general policy an annual
dividend of 20% of last year's net income. Even though the amount
or opportunity of future dividends cannot be guaranteed, Bachoco
expects to pay an annual dividend to the holders of outstanding
shares equal to an amount of no more than approximately 20% of
the net income of the previous year."
The company lost money in 2008, so it didn't pay the dividend
that year in accordance with its clearly stated policy. But this
year it's scheduled to pay a dividend of 2.9%.
That's on news that 2010 profits were up 10% year-over-year from
This company's clear and straightforward dividend policy is
great for shareholders. A reliable dividend also gives the stock
some degree of defensiveness should the broad market get
shellacked. In other words, investors who snap us shares of Bachoco
now are heeding the sage advice of John Hussman by not buying
overvalued large cap stocks.
Bachoco is also in a somewhat defensive sector, being that it's
essentially an integrated poultry producer. Mexican citizens aren't
likely to stop eating chickens, or eggs, anytime soon.
Okay, so there's one more reason to like this stock…
*****There's actually considerable potential upside for the
stock. The upside is related to an ongoing investigation against
American poultry companies being conducted by Mexican authorities
at the behest of Bachoco.
Bachoco has accused American firms of dumping cheap chicken
products on the Mexican market, in violation of NAFTA.
I'm not sure how this dispute is going to play out, but in the
worst-case scenario, it might turn out that Bachoco is wrong and
there's no funny business going on. In that event the story will
That wouldn't necessarily be a bad thing for Bachoco's stock -
it would probably be a non-event.
But if some big news comes out of this story, Bachoco could
stand to benefit in the Mexican markets it serves as a champion for
the Mexican consumer - protecting the little-guy from cheap
I think there's plenty of upside for this stock, especially as
commodity prices continue to rise - because this company has
integrated production, and the ability to profit from rising food
The dividend isn't too shabby either.
if you're interested in finding out more about my favorite small
cap dividend companies, including a gold company that currently
pays a 9% annual yield.