The End of Wall Street?
All it takes is one day of red in the stock market and the tub thumpers emerge from the woodwork. Yesterday stocks plunged, and the Russell small-cap index dropped by 3.1%. If you're invested in individual small and micro-cap stocks, you really felt the sting as many dropped by over 10 percent.
I love it when all of the sudden everything in the media is darker than the
This reminds me of the mass hysteria that ensued when the markets really sold off in 2008. When 5% plunges in the Dow were commonplace. Now I'm not saying we shouldn't be looking to the media to keep us informed, but take everything you read with a grain of salt. A 3% plunge in the Russell, and a 10% drop in your favorite small-cap stock doesn't mean the end of Wall Street is imminent.
***Yesterday I received an email from Tommy who is wondering if Del Monte Foods (NYSE:
"Del Monte looks like a fairly strong stock and is paying a dividend. I like dividend stocks, but not sure how much upswing this one has left. Your thoughts?"
I still like Del Monte Foods, even though the stock has run up. The reality is all stocks have made massive gains, so we need to consider what the future holds, not just what has happened in the past. But I don't like to make things too difficult. If something is working, stick with it until it doesn't work anymore. Small-cap value stocks like Del Monte are working, and it's had a nice pull-back recently.
Del Monte is trading with a trailing PE of 11.9 and based on analyst expectations of earnings per share of $1.22 in 2010, is trading with a current PE of 12.2. Analysts expect the company to grow earnings by 65% this year – way above the 13% growth rate expected in the broader processed & packaged goods industry.
But analysts are only factoring in 7.4% growth in 2011, well below the anticipated 10% growth in the industry. Yet they are continually raising EPS estimates for Del Monte, and have missed by 60% to 70% over the last two quarters.
In other words, Del Monte is expected to significantly exceed industry performance this year, but significantly underperform next year. However, analysts have been underestimating earnings, even while they continually raise guidance. I think there is a big disconnect here, and have yet to see a compelling argument for why this company can't continue to exceed expectations in 2011.
It seems to me that there is plenty of room for this company to continue to outperform the industry, and accordingly it should trade with a valuation at least on par with the industry – which has an average current PE of 14.5. Valuing Del Monte with this same current PE yields a price target of $17.70, or 18% above its current $14.93 price. The stock has not broken through $16 yet, and I'm not saying it will tomorrow, but I think it has the potential to break above that resistance and through $18 in the next 12 months.
The 1.3% dividend is just an added bonus, and should provide some downside support in the stock price as well.
Of course, you need to believe in the desirability of products that Del Monte sells, and I'm not going to spend a lot of time on that today. In my eyes, the upside catalysts are great brand recognition driving more consumers to Del Monte's products and the pricing power to bring in more revenue per unit sold with price increases. That's a good combination, and improved marketing efforts have helped to drive sales in recent quarters.
I still think there is room to the upside for this stock, and not as much downside risk as may exist in lower quality stocks. It may not be a double in the next year, but conservative small-cap stocks should have a place in your portfolio as well. I hope this helps to answer Tommy's question. As always, complete your own research on any stock you're considering purchasing shares of and consider your own risk appetite.
