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Just Because The Food Taste Great Doesn’t Mean It’s A Good Investment! Go Deeper

Go deeper into the financials before investing.

 

This article was first published by Investment Moat.

One of my earliest investing influences was Peter Lynch.

Peter Lynch was quite the fella. He was the fund manager of Magellan Fund at Fidelity Investments where he compounded the fund for 13 years at 29% compounded annual returns.

I read his book One Up On Wall Street in my early days. It was an easy read and for the novice investor then, I can pick up many ways to prospect business to invest in.

One of the advice Mr Lynch provided was to go down various business research based on good reviews by his wife.

His advice was that: Look at places where you come into contact with the products on a frequent basis. There must be a reason you keep consuming or using them.

In Singapore, had you follow their advice, things that come to your mind would be: Food.

Singapore is known as a food paradise, and the expatriates consistently cite that, when they go back to their home country, they really miss our local cuisine!

The F&B sector thus making a fertile hunting ground for stocks that you can see, touch and taste.

Some of the famously listed names are:

1. Old Chang Kee

2. BreadTalk

3. Soup Restaurant

4. Tung Lok

5. Jumbo Group

6. Neo Group

7. Sakae Sushi

8. Ajisan Ramen (Japan Food)

9. Super Group

You must have tasted some of them before

Food That Taste Well Doesn’t Necessary Become Great Companies To Invest In

Many folks who read Peter Lynch’s materials fail to comprehend that what he means is that things that are familiar to you merely provide a good starting point for you to identify possible companies that are worth investing in.

One common mistake when picking business to invest in is: it taste good and there are always so many people, therefore it must be good to invest in!

One good example is Japan Foods Holding.

Japan Foods Holding runs Ajisen Ramen. If you survey enough people, they will tell you how lowly rank their Ramen is versus what the competition out there is offering.

However, go look at their cash flow over the last few years. Look at their ROIC as well. You will be scratching your head wondering why such “poor quality” Ramen can generate such good results.

Good crowds and good food act as a good starting point, or to perk up your curiosity.

What makes it a worthwhile investment is when you look deeper, into the numbers and the story.

My Process Of Prospecting Stocks

One of the processes of how I go from an idea to putting in money or discarding the idea is this:

1. Curious about why something does extremely well.

2. Inspect its financial statements to find evidences that extremely well business which translates to good cash flow.

3. Learn more about the business, the nature, addressable market, opportunities and challenges.

4. Inspect some of the competitors to develop a better understanding why the competitors cannot measure up. In some cases, the competitor is doing just as well. In that case, compare the two counters and determine which provide the better investment opportunity.

5. Come up with a valuation based on what I learnt in step 2, 3 and 4.

We can take what we have learnt from Mr Lynch and explore further.

A hot question that I get frequently is how do you carry out Step 3 and Step 4

Understanding The F&B Story Through Analyst Reports

There is the long way and there is the short way.

The long way for me is to search through Google newspaper readings, white papers and past analyst reports to form a good idea of how much more can the food and beverage market expand to, what are the headwinds these food and beverage companies face.

The short way is to be on the look out for analyst reports from brokerages, especially initiation reports.

The focus on these reports is not whether to buy or sell, but to form your picture of the food company that you wish to invest in and its competitors.

And you can learn a fair bit.

Here are some snippets of useful information that I extracted from a Voyage Research report for the Food and Beverage sector. Do click on the link if you want to run through the full report and presentation.

It will be foolish to think that all these food and beverage companies are similar to one another. Each of them has opportunities and risks because they are involved in one or a few of these portions of the value chain.

Learn how to investing in stocks in the real estate sectorHow would you know Food Empire’s competitors?

Knowing who their competitors allow you to see whether Food Empire’s cash flows, gross margins, operating margins are better than their competitors.

You would also be able to compare their valuations to see if they are cheap enough to buy.

Reports like these give you a good idea of which other companies to look into.

investing in food and beverage stocksHow is the sector average ROE, dividend yield and price to book ratio? Knowing the sector average would allow you to see whether the stock you want to buy is better or just an average sector stock.

investing in food and beverage stocks in Singapore

Most importantly, what are the kind of risks or challenges that you may not have the competency to uncover?

Reports such as these allow you to realize an angle that previously you have not thought of.

If you like to find out more about the F&B sector to evaluate for yourself the outlook of the companies in the sector, you can refer to this playlist on Youtube that covers a recent seminar on the F&B sector organised by SGX.

Summary

In the USA, Food and Beverage stocks like Starbucks, Chipotle and Macdonalds have long been seen as value growth plays because of the high return on investment capital.

These great dynamics is not constrained to the USA, on a single restaurant, you should be able to earn back your money in 3 years, so that makes the ROIC to be 33%.

F&B business can be challenging but the one that grows well can be rewarding.

To find out the dynamics of the Food and Beverage sector, it is worth watching this video presentation from an SGX Investor Education seminar.

This article is written in collaboration with SGX. To stay up to date with the latest news from SGX, you can like the SGX My Gateway Facebook Page.

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