Phil Town
Phil Town

Here's a letter from Lynn.  [Names changed to protect the innocent! Letter edited for length.]

Hi Phil,

I have a problem of  a different sort.  I have been studying my butt off with all of this stock research.  I feel like I am understanding more and more but not comfortable yet as I haven't really paper traded anything and haven't really spent any money but I know in time that will come and that's okay.  Like you said, the market isn't going anywhere.  And, for once in my life I feel I have actually been quite patient and okay with it as that is how you teach it and it makes sense to me.  Plus, I also have not lost any money.  The Rule #1 investing book rocks.

Some guy calls Jerry (my husband) on the phone from S_____ (broker),  telling him he can't lose any money or at least not much, talks to him for probably 10 - 15 minutes and has Jerry spending $20,000 on FDP (Fresh Del Monte produce).  When I found this out I could have killed him.  I asked him why he felt the need to do that.  He said to make a lot of money.  I'm thinking if it sounds to good to be true, more than likely it is.

I researched this company, I don't like the sound of the CEO (sounds shady) and to be honest, I didn't give Jerry much of a chance to explain anything as I was so mad.  He can talk to a guy he doesn't know from Adam for 15 minutes and throw him $20,000.  I (his wife of 21 years, lets see if we can make it to 22) can research my butt off and try to do this the way I feel and also the way I thought he felt, is a safe yet profitable way, and where does it get me?  And even if the company does make a lot of money, just reading about the guy was giving me the creeps and it wouldn't have been a company I would feel comfortable investing in and I told him so.  Remember, it needs to be YUMMMMY. FDP's numbers are awful. Not a Rule #1 investment at all.  I think I am going to go crazy.

HELP!  What do I say to my husband other than are you nuts?  I need an answer soon as he hasn't sent the check in yet.

Thanks Phil,


P.S.  I would love to play but my shoulders are weighted down too much.

Yikes!  My response:


Since I've been divorced twice I don't think I'm real qualified to help you find the right answer to your issues with your husband, except to say that two heads are often better than one, especially when they love each other.

But I can look at FDP and give you my opinion for what it's worth.  And my disclaimer here is that I am a river guide, I have a license to row the Grand Canyon, to drive a car, to fly a plane, and that's it.  So for what it's worth here's how I see FDP:

I want to know whether I can put a value on this business at all.  Is it predictable enough to be able to make an educated guess about the future?  Let's start with the Big Five Numbers:

1. ROIC: Long term it looks good -- above 10%, but big red flag on the latest ROIC numbers at 7%.  This is a sign of trouble.  The CEO is having trouble making a decent return on the owner's equity and whatever he can borrow. Red Flag #1. 2. Sales Growth Rate:  Not bad at all.  Consistent.  Roughly 12%. 3. EPS Growth Rate: Whoa.  Now that's some ugly stuff right there! It's totally inconsistent and over the last 3 years its dropping like a brick.  They are selling, but their costs are killing them.  BIG red flag. 4. Equity growth rate: WOW.  Stellar!  24% roughly per year and totally consistent for ten years.  Except that seems weird with the terrible earnings growth. So I dug deeper and noticed that Current Assets [see Balance Sheet] were keeping up with all that great equity growth. So I clicked on the SEC docs and discovered since 1996, Del Monte is a foreign business.  Turns out they are a Cayman Island business with wholly owned subsidiaries in a whole bunch of different countries around the world.Further turns out that the CEO/Chairman and three of the six directors are all members of the Abu-Ghazaleh family from Dubai, UAR and that this family owns 52% of the stock -- and therefore totally controls the business and the board of directors.  To ensure things stay that way, they put in place "anti-takeover agreements" to avoid being kicked out without a huge payoff.

5. Free Cash Flow: Dropping like a stone the last two years.  Another Big Red Flag.

So here's what we have so far:

The Big Five Numbers are inconsistent or negative between them, which is a sign of a business that is not predictable enough to determine a retail value by Rule #1 standards -- since the real value of a business lies in its ability to produce future cash flow, and that seems more than a bit questionable at FDP.  Moat seems questionable.

While I usually like family run businesses, I'm not a big fan of officers and directors who put in anti-takeover provisions.  Those things keep bad guys from being tossed out by the shareholders and are the opposite of "owner-oriented".  I also don't like big companies having lots of conflicts of interest.  It brings up the question of honest dealing.  Management seems questionable.

But, hey, maybe the business is so cheap right now that I'd want to buy it anyway -- so let's do the Sticker Price thing:

1. TTM EPS is $1.84 2. Future EPS Growth Rate:  Historical Growth is too inconsistent to say -- so I'm going to use the analysts' best average guess of 9%.  And I think that's very kind of them. 3. Future PE:  9% would give us an 18 Rule #1 PE, except the historical PE for this biz is a lot lower.  I'm going to be nice and put the PE at 15. 4. Sticker: Grow the $1.84 at 9% for ten years you get $4.36. Multiply by the PE of 15 you get a future stock price of $65.  If you want a 15% return, you buy for one quarter of that today:  $16.  And if everything works out, you'll end up with a 15% return.  Nice except that everything doesn't always work out, so we need a big margin of safety in the purchase price -- so we divide the Sticker by two... 5. ... and get the Margin of Safety price of $8.


The above is just an example.  I can't really put a Sticker price on the stock because it's too inconsistent to rely on a 9% growth rate or a 15 PE for any time into the future.

But if everything works out according to what the analysts think will happen, and you pay today's price of $16.82, you are buying at about the retail price.  Not horrible, if things work out.

That means that this is not one of those terrible deals where you buy and if everything works out you might make 5% a year.  At least on this one if it all works out okay you'll do the minimum rate of return.

Would I buy it?  Ag biz is so loaded with risks that any ag biz is going to have to be on sale big time to get my attention.  This one has a strong position in the retail market, but is not a Rule #1 biz -- and beyond that is subject to increasing gas prices and labor issues and international tariff wars and crops dying and producing too many of something and having to hedge... and on and on.  It's really a tough business and not something I'm real excited about, especially at retail.

Could it shoot up on some good news?  Yeah. Sure. The Big Guys only care about this quarter, so that can certainly happen.  Maybe your hubby's broker has some inside info and this investment is going to work out great.

On the other hand, the stock has gone from 30 to 16 in a pretty consistent down trend this year, so he's betting that the thing has found the bottom.  There is a base building at $17 and some volume indication that the big guys are moving back into this right now.  The price is leveling, the MACD is pushing toward a buy signal.  It could pop back to $22 for some nice quick money, but it could also continue to drop like the stone it's been.  If there was really any good news out there we'd be seeing more buying -- and volume is below its average.

By the way, this stock averages about 500,000 shares a day -- which is right at my minimum for liquidity.   Be aware that low volume and heavy ownership by the insiders can make for a very volatile combo both up and down.

All it takes to jam this price upwards is the company deciding to buy stock... and they have a buy-back plan in place so they could do it.  If they do (and at this low price they would be incentivized to do so) then they can make this jump all by themselves. For a while, anyway.

Bottom line:

This looks like nothing more than a bottom guess with a prayer that the FDP CEO decides to use company money to buy the stock back.  Looks like he did exactly that a couple of months ago and drove this up from 18 to 22, but it was unsustainable.  He might do it again and you guys would score.  But don't hold for a second after it hits $21 if you decide to roll the dice.

Hope that helps.

And now go play anyway!


P.S. Lynn wrote back later. It seems she talked her husband out of making the purchase.

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