Seven Lakes market analysis

Institutions are buying undervalued consumer staples

Author

Seven Lakes Research
October 06, 2023

Hello Seven Lakers,

We had a look at our data and noticed that big investment funds are buying consumer staples stocks

More specifically:

  • Medifast (MED): health and wellness company

  • Archer-Daniels-Midland (ADM): human and animal nutrition company

  • Kraft Heinz (KHC): food and beverage company

Data on MED, ADM, KHC

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WHAT’S THE INVESTMENT FUNDS’ STRATEGY?

A] Strategy:

  • Investment funds are currently screening the market looking for “buy low, sell high” opportunities

B] Undervalued sector:

  • They have identified the consumer staples as an undervalued stock sector, where they are currently placing buying orders on several stocks

  • Consumer staples names have lagged over the past year as inflation slowed down consumers demand

  • Thus, many of these stocks are trading at significant discounts to their historical price action and some are offering deep-value and high yields

  • While these stocks don’t offer a robust outlook for growth, they offer an outlook for steady business, improving profitability, dividend coverage, and distribution growth that outpaces the broad market

C] Stocks they are buying:

  • Stocks like Medifast (NYSE: MED), Archer-Daniels-Midland (NYSE: ADM), and Kraft Heinz (NASDAQ: KHC) are being bought the most by the institutions, and analysts see them moving higher

  • Assuming these businesses can continue to perform as expected, their share prices should appreciate over time while paying market-beating yields

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WHY BIG FUNDS SEE MEDIFAST AS A NICE BUY

Medifast is a health and wellness company focused on diet supplements

A] Company situation:

  • Several new weight loss drugs hit the market in the last months and have hurt the outlook for weight loss supplement companies like Medifast

  • Medifast business is in decline compared to last year, but that is compared to record levels and the pandemic bubble

  • The business is normalizing above the 2019 levels, which means robust dividend coverage for this 8.5% yielding stock

B] Dividends:

  • The dividend coverage is running at roughly 2x the payout

  • The payout ratio is about 50% of the full-year outlook, given the company’s outperformance in the first half and the balance sheet

C] Cash position:

  • As of the latest report, the company’s cash position is nearly double compared to last year, and there is no interest-bearing debt

  • This has the company set up to continue raising the dividend, if not at the double-digit CAGR of previous years

D] Why institutions are buying:

  • The yield and the value, about 9x earnings, are why institutions buy this stock

  • The institutions own about 88% of the company and have been buying on balance for 4 consecutive quarters

  • One noteworthy buyer is Point72, founded by Stephen Cohen, which purchased nearly 0.50% of the stock in Q3

If you want to be notified every day when funds, whales, politicians purchase stocks, feel free to click below 👇👇👇👇

WHY BIG FUNDS SEE ARCHER-DANIELS-MIDLAND  AS A NICE BUY

Archer-Daniels-Midland is a human and animal nutrition company

A] Company situation:

  • Archer-Daniels-Midland is well-positioned as the middleman between farmers and consumer foods manufacturers

  • It handles and processes agricultural commodities to provide useable products for food manufacturers and industry

B] Why institutions are buying

  • This stock trades at ~11x its earnings, providing a value relative to its sector and the broad market while paying a 2.35% yield

  • Institutions own about 78% of this stock and have been buying on balance for 4 consecutive quarters

  • They have put a floor in the market near $75, and the price action is heading toward it

  • Analysts also see this stock moving higher, more than 25%, so a bottom should be reached soon

If you want to be notified every day when funds, whales, politicians purchase stocks, feel free to click below 👇👇👇👇

WHY BIG FUNDS SEE KRAFT-HEINZ  AS A NICE BUY

Kraft-Heinz is a food and beverage company

A] Company situation:

  • Shares of Kraft Heinz corrected within a trading range this year and hit the bottom of the range in Q3

  • That coincided with a surge in institutional activity, leading to a rebound in the price action

B] Why institutions are buying

  • The analysts have been trimming their price targets for KHC this year but still see it moving up about 22%, which is well above last year’s consensus figure

  • The low price target assumes the market is fairly valued near the bottom of the range, which helps confirm the bottom of the market

  • Institutions have bought this stock on balance for 7 consecutive quarters, so the spike is telling

  • Institutions own about 75% of the stock, with Warren Buffet and Berkshire Hathaway holding nearly half

C] Upcoming catalysts

  • The next catalyst for KHC is the Q3 earnings report due at the end of October

  • The analysts have been trimming their targets so the bar could be set low

  • A solid report could add momentum to an already-rebounding market in that scenario

If you want to be notified every day when funds, whales, politicians purchase stocks, feel free to click below 👇👇👇👇

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