Barron’s 400 Newsletter
Beginning this week this column will highlight some of the many stories found within the Barron’s 400 Index and offer our insights and perspectives on the U.S. stock market as seen through the B400 lens. In some cases we will bring to your attention individual companies that we think offer good investment prospects; on occasion we will comment on how we think events in the world of finance, investments, economics and current affairs are reflected in the index and, more importantly, what we think they mean to you as an equity investor. And during earnings season we will report on the state of affairs at the B400 companies in contrast to the widely available reports on the state of U.S. corporate earnings among only the largest companies in the country as tracked by the S&P 500 Index. We think this will offer a very useful complement to what most of the financial media reports, particularly since B400 includes many smaller companies than those found in the large cap benchmarks. In fact we expect many of today’s B400 components to become tomorrow’s large cap darlings.
Readers of the popular Barron’s 400 Diary, penned by John Prestbo and published at MarketGrader.com, need not worry as this isn’t a replacement for John’s insightful column but rather a complement, as we broaden the net of topics we will be writing about. We hope you enjoy our new column and encourage you to share it with your friends and colleagues, who may sign up to receive it directly, for free, by clicking here
B400 Selection Highlight – The Fresh Market, Inc. (NASDAQ: TFM)
We begin this week by highlighting The Fresh Market (NASDAQ: TFM), a specialty grocer in the high end of the food retail market, started 32 years ago in Greensboro, NC. Focused on locally sourcing the freshest produce available in combination with premier global merchandise, today the company operates just over 100 of its small format stores across 20 states. With a current market cap of $2.5 billion, TFM has been graduating of late into the mid cap space, which is sure to open the stock to index funds that previously would disregard it based on size. This road, however, has not been without obstacles. The stock, which doubled in price between August 2011 and August 2012, when its reached its latest 52-week high of $65.69, ran head first into a short-seller brick wall last November when the company missed its Q3 earnings estimate, plunging 15% in a day. Its decline wouldn’t halt until early March of this year but not before the company lost about a third of its market value.
Right on cue, B400 picked up the company in its March rebalance, since the once-high-flying growth company could be bought for two thirds the price where it traded during the index’s prior rebalance in September. Channeling its inner Ben Graham, B400 scooped the shares of a company that, fundamentally speaking was in almost pristine shape. In fact, TFM’s shareholders’ equity through the quarter ended in April has more than tripled in only two years.
What caught our attention this week about TFM, to be frank, was not the story of how B400 selected the stock this spring (plenty of those GARP stories in B400), but rather a screen we track regularly at MarketGrader called “Improving Sentiment Stocks” (familiar to our Bloomberg subscribers). This screen identifies stocks whose MarketGrader Sentiment score has been rising steadily over the last four weeks. As a refresher, the MG Sentiment score ranges from zero (0) to ten (10) and is based on four unique indicators that measure factors tracking a stock’s supply and demand irrespective of the underlying company’s fundamentals. Anything above seven (7) is positive and anything below four (4) is negative. The key to using this screen as a source of investment ideas is to identify those stocks that have been out of favor for some time, typically with Negative Sentiment, which have recently started to climb into the Neutral Sentiment zone but before they turn Positive, at which time the broader market is likely to have jumped on the band wagon. This week TFM fit the mold. The stock had had a Negative Sentiment rating since the beginning of March, when the stock was trading around $47. It turned Neutral, based on a score of 4.2, on May 13th, when it was trading at $44. Now trading at $52, TFM seems to have the wind at its back as its Sentiment indicators continue to improve. In our view this means that not only the momentum, risk-on crowd is likely climbing back on board, but that growth investors who had recently penalized the stock following its November EPS report might be back soon too.
With a forward P/E of 31.6 the stock is admittedly not cheap, but this is not entirely without justification (which is where GARP comes in). Its PEG ratio, which measures P/E relative to the company’s expected EPS growth rate, is 1.5, in line with the average for all B400 stocks and right around the median (mid-point). Clearly investors are willing to pay a slight premium for the company’s growth.
The company’s fundamentals continue to be stellar in our view, with very little debt, which accounts for just 6% of total capital. The company’s return on equity, on a trailing 12-month basis, is a remarkable 31% and its operating margin, a closely followed metric in the food retail industry, was 9.7% last quarter, a full 5.5 percentage points above its peer average.
With the U.S consumer on the mend, particularly at the high-end, and the growing popularity of smaller, locally sourced food retailers (think Whole Foods 10 years ago) The Fresh Market appears well positioned for continued growth, especially considering its small national footprint. For those concerned about another earnings miss, you might find some consolation in thinking like we do that TFM is an attractive acquisition target, which is likely to put a floor under the stock price. Of course, for those who prefer broad stock diversification, there is always B400.
