Issue #27: A plant-based food brand that is growing rapidly and a high dividend "sin stock" to hedge against a recession 🚨
Nancy Zevenbergen started her first fund at 28, working from her living room while nursing a child. Today she manages almost $6 billion, and her two main funds gained 126% and 124% in 2020.
Zevenbergen hasn’t only excelled during bull markets. She has beaten the SPX by an average of 4% a year since 1987.
What’s her secret? She ignores valuation and focuses on innovation.
Zevenbergen says her job is to “understand the ‘crazy’ visions of new leaders and become investors alongside them.” She has a strong preference for companies led by their founders.
That philosophy led her to very profitable early-stage investments in Amazon, Netflix, Apple, Microsoft, and Tesla.
Let's get into this week’s report. Here’s what we found:
- A plant-based food specialist that’s growing fast and trading at an attractive valuation.
- A high-dividend “sin stock” that the world loves to hate and the market loves to buy and hold.
Tattooed Chef, Inc. ($TTCF)
$19.26 - Share price at the time of writing
- Tattooed Chef Inc. produces plant-based frozen foods. The Company has over 6000 retail outlets and an active online sales channel.
- The Company has shown consistent growth in sales and revenue. It has plenty of cash and minimal debt.
- $TTCF trades at much more attractive valuations than industry leader Beyond Meat.
- Tattooed Chef Inc. is positioned to benefit from the long-term trend toward healthier, more environmentally sensitive diets and the rapidly growing vegan food market.
What they do:
Tattooed Chef Inc. produces and sells a range of prepared plant-based foods, including vegetarian, vegan, and gluten-free options. Foods are sold in frozen form, typically in bowls and pizzas that require only a quick microwave heating.
The Company focuses on freshness, quality, and sustainability, with most ingredients grown in Italy. Reviews indicate a high degree of satisfaction with the quality and taste of the food.
Tattooed Chef sells products online and through retail outlets. Many retail outlets are smaller health-oriented stores and convenience stores, but the Company has drawn attention in 2021 by moving into mainstream supermarkets like Target and Kroger’s.
Tattooed Chef is acquiring Foods of New Mexico, which has operating plants manufacturing a range of southwestern and Mexican foods. The acquisition will help $TTCF expand into this $20 billion sector.
$TTCF expects to have 10,000 retail outlets by the end of 2021.
Why they’re spiking in interest:
Data from MarketStream.io show a significant surge in mentions of Tattooed Chef in May, June, and July. Discussion is up 240%, with several spikes marking vigorous conversations about the stock.
The increased interest appears to be the cumulative result of a series of news items.
- On March 10 Tattooed Chef announced that their Products would be carried in Target stores nationwide.
- On May 3 the Company announced the Foods of New Mexico acquisition.
- On May 12 they released Q1 2021 results, showing 59% revenue growth and 105% growth in sales of company-branded products.
- On July 12 Tattooed Chef announced that their products would be sold in Kroger supermarkets.
The Company also predicted revenues of $235 and $242 million for 2021 and a minimum of $300 million in 2022, up from $148.5 million in 2019.
These announcements came as the stock price slid 28% from its January high of $26.81. That drop, against the backdrop of positive announcements, led to an extensive discussion of the stock’s valuation and the opportunities it could create.
Notable comments from Reddit:
"Honestly, the stock is undervalued but Tattooed Chef’s brand and customer demand is on the rise. They’re penetrating National supermarkets with lighting speed. Buy stock in TTCF is safe and low risk. Call options too are good. Higher risk but massive gains as the Tattooed Chef executes."
"...they own the whole damn supply chain. From the vegetables all the way to the final product. They are constantly increasing capacity to be able to meet demand. This enables TTCF to munch on inflation, as they don't have suppliers. Essentially, this will guarantee rock-solid margins once they slow down their growth and focus on profitability.”
Signal: Major institutional holders of $TTCF include Falcon Edge Capital and The Vanguard Group, with a combined 3.38 million shares. Ken Griffin of Citadel holds $7.65 million in $TTCF shares.
Why $TTCF could be valuable:
6% of Americans - almost 20 million - describe themselves as vegans, up from 1% in 2014. 39% of Americans are adding vegan options to their diets. Google searches for Vegan-related terms grew 47% in 2020.
The packaged vegan food market reached $12.7 billion in 2019, and is expected to grow at a CAGR of 9.5% through 2026. The US market is close to $1.2 billion and is expected to reach $1.64 billion by 2026.
Tattooed Chef Inc. stands to benefit from both the expanding market for vegan alternatives and the trend toward prepared meals that are healthy, delicious, and convenient for working people.
The Company is vertically integrated, controlling everything from crop production (largely in Italy) to distribution.
This allows $TTCF to control its costs and assure quality. The production base in Italy offers both lower costs and a reputation for high-quality food.
$TTCF is completing a transition from dependence on private label products to reliance on its own brand. Tattooed Chef branded products made up 4% of revenue in FY2018 and 56% in FY2020.
Tattooed Chef currently has 250 plant-based food products in development, assuring a continuing stream of new products.
The primary competitor of Tattooed Chef is Beyond Meat ($BYND), a much larger company. Beyond Meat has focused on making meat substitutes and selling them to fast food and other restaurants.
This has caused challenges: matching the natural texture and flavor of meat has been difficult and public acceptance has been limited. Restaurant sales plunged during the pandemic, reducing the market for these products.
Sales of Tattooed Chef’s pre-prepared convenience meals showed strong growth during the pandemic. The products are built around high-quality fruits, vegetables, and other natural ingredients. Most do not depend on passing off a substitute as meat.
$TTCF currently trades at less than 10x sales and 5.46x book value. $BYND trades at 19.1x sales and over 30x book value. $TTCF has over $185 million in cash and only $2 million in debt, while $BYND’s debt of $1.4 billion exceeds its cash holdings of $1.1 billion. $TTCF offers a 36.22% return on equity, while Beyond Meat comes in at -24.9%.
$TTCF clearly has better fundamentals and is in a better business position than its primary competitor.
What the risks are:
While Tattooed Chef currently has limited direct competition, that may not last. The company’s success could lead major food companies to produce and sell competing products. Many of these companies have much larger production capacity and wider distribution networks.
The current growth trend of plant-based diets may not continue.
Tattooed Chef relies on two production facilities, one in Paramount, CA and the other in Possedi, Italy. A serious problem at one of these facilities could affect production. This risk will be reduced by the integration of the facilities acquired with Foods of New Mexico.
At the end of 2020 88% of $TTCF revenue came from 3 outlets. This concentration has been reduced by the addition of Target and Kroger to the distribution mix, but customer concentration could still be a risk.
Any publicized problem with food quality could significantly affect sales.
Bottom line: Tattooed Chef is a rising player in a fast-growing market. Its business strategy has been more effective than its primary competitor and its financial position is strong. Rapid increases in revenue, a growing distribution network, and well-received products are all positive indicators.
Altria Group, Inc. ($MO)
$47.49 - Share price at the time of writing
- Altria Group is America’s largest producer of cigarettes.
- Altria is the parent company of Philip Morris USA, John Middleton Inc, and US Smokeless Tobacco Company.
- Altria owns 43.5% of Cronos Group, a Canadian cannabis company, 10% of brewer Anheuser-Busch, and 35% of e-cigarette maker Juul Labs.
- Altria is consistently profitable and trades at an attractive P/E ratio. The current dividend yield is an exceptional 7.24%.
What they do:
Altria Group is America’s largest tobacco company. Its brands include Marlboro, Virginia Slims, and Black and Mild cigars. Smokers traditionally display a high degree of brand loyalty, so these brands are major assets.
Altria also owns or holds a significant interest in a number of other companies. These include:
- US Smokeless Tobacco, a wholly-owned subsidiary, makes the Copenhagen and Skoal brands of smokeless tobacco.
- John Middleton Co., another wholly-owned subsidiary, manufactures cigars and pipe tobacco.
- Burger Söhne Holding AG, a wholly-owned subsidiary, makes nicotine pouches used without smoking or chewing.
- Juul Labs Inc. is a manufacturer of e-cigarettes and vaping accessories. Altria owns 35% of Juul.
- Altria owns 43.5% of Cronos Group, a Toronto-based manufacturer of cannabis and CBD products.
- Altria owns 10% of Anheuser Busch ($BUD), brewer of Budweiser, Michelob, and other popular beers.
- In early January Altria reached an agreement to sell its Ste Michelle Wine Estates division, the nation’s third-largest wine company, for $1.2 billion.
Altria has embraced a widely publicized initiative aimed at “moving beyond smoking”. As of March 2021, 87% of revenue still came from smokeable products, with oral tobacco products contributing 10%.
What we can learn from interest levels:
Unlike many of the companies we cover, Altria is very well established. The Company ranks #138 in the Fortune 500 and is a member of the S&P 100. It’s included in almost every discussion of dividend stocks.
Because the company is so well known, social media buzz follows a regular pattern. There’s little or no discovery factor, the sudden burst of attention that hits when a company lands on the radar of the investment community for the first time.
Altria saw a distinct pickup in social media buzz in March and April. Reddit mentions rose to an average of over 50 a day and spiked to 400 in mid-February before settling to a more typical 10-20 per day from April onward.
This surge coincided with a steady rise in the stock price, from $40.77 on Feb. 1 to $52.50 on March 26, a total gain of around 27.8%. As the stock settled in a band between those extremes, interest settled as well.
That’s a normal pattern for large, well-known “boring” stocks: they get attention when they’re rising, not when they are steady. That pattern may miss the investment proposition of $MO, which is more about the dividend and resilience to recession than about appreciation.
Notable comments from Reddit:
"Right now, my entire portfolio consists of MO, because I think it’s extremely undervalued. I have 200 shares outright, I have bought calls on the dip, sold covered calls when the price was cheap, and I’m collecting a nice dividend in the 7+%… it’s been a good run."
“MO's even better. Every few years they spin off entire companies.I bought MO in 1999. Since then it has doubled its own dividend and spun off PM, MDLZ and KHC, each with their own dividends as well.”
Signal: Over 61% of the outstanding $MO shares are held by institutions, with The Vanguard Group and Blackrock Inc holding a combined total of over 290 million shares.
Why $MO could be valuable:
The US cigarette and tobacco industry grew at 2.5% annually from 2016 to 2021, faster than the overall manufacturing sector. The tobacco industry has been able to sustain profitability even as the overall number of smokers declines.
$MO is the largest player in the industry and its well-established brands are ideally positioned to benefit from future growth.
Tobacco sales traditionally hold up well even during recessions. That factor combined with $MO’s dividend yield makes it unlikely that the stock would see significant losses in a market downturn.
Altria Group shares are attractive to investors seeking a hedge against a possible market downturn. That is likely to generate increased buying during periods of uncertainty.
Altria has a track record of spinning off subsidiaries, with shareholders receiving shares in the new companies.
Long-term $MO holders received one share of Philip Morris International for each $MO share they owned in 2008 and 0.7 shares of Kraft for every $MO share they earned in 2007.
What the risks are:
Altria’s Juul Labs subsidiary faces significant legal liabilities stemming from an outbreak of vaping-related illnesses. These lawsuits could result in substantial settlements that could affect Altria’s results. Other legal action over marketing practices and the health impact of smoking is possible.
Cigarettes are a heavily regulated product. Additional regulations could substantially affect Altria’s value.
Altria is currently carrying a large amount of debt, much of it from the Juul acquisition. So far Altria has managed its debt reasonably well, but if the company encounters any serious headwind the debt could become overwhelming.
Altria is a dividend king, meaning that it has increased its dividend every year for the past 50 years. Given the Company’s debt and legal liabilities, the current dividend may not be sustainable. The dividend is a major reason for holding Altria stock and any reduction in the dividend could have a serious impact on the stock price.
Bottom line: Altria has a high dividend yield and a continuous record of dividend increases Combined with the resilience of the tobacco market, that makes the Company a solid income generator and an appealing hedge against any market downturn or recession.
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