Finding Your Next Stock At Your Christmas Dinner
"Invest in what you know."
Wise words from Peter Lynch, a famous investor who recorded for several years an annual return of about 30%. The logic is simple: invest in companies that produce products or provide services that you use in your every day life. Thus, it is easier to understand and analyze what the company does, and the average investor can understand their potential better than others.
Examples of Peter Lynch investments are Taco Bell -- currently a subsidiary of Yum! (NYSE: YUM) -- and Dunkin 'Donuts (NASDAQ: DNKN) business that we all know and that are part of our daily lives. I recommend you invest in a similar way, and let me recommend a first step.
Will have Christmas dinner? You may come across with food for thought
We are in December and in a few weeks we will be having Christmas and year-end dinners. As usual,no table is complete without -- the meat dish! This year I would like to ask you to think about something while you eat the special recipe of Grandma's meat dish and hear the bad jokes of your uncle. Think about the business that exist behind the food right in front of you.
It doesn't matter if you're having beef, chicken, turkey or pork, it probably comes from one of the two Brazilian largest meat companies.BRF (BVMF: BRFS3) and JBS (BVMF: JBSS3) are the companies that will most likely put the meat in your Christmas dinner, and also for people all around the world.
This company controls 20% of poultry world trade
In 2009 the two largest Brazilian companies in the chicken market announced their merger. After a disastrous financial transaction that caused losses of millions of dollars to Sadia, its shareholders had no choice but to merge their operation with Perdigo. Completion of the merger took a little more than two years,since each side needed to comply with requests from the CADE (Conselho Administrativo de Defesa Economica). In 2012, the company was called BRF, the owner of strong brands with sales in more than 100 countries.
Throughout this period, the largest customer of BRF, Companhia Brasileira de Distribution - Pao de Acucar (BVMF: PCAR4), underwent a corporate dispute ended in 2013 with the departure of Abilio Diniz, son of the founder of the company and responsible for building one of the largest retail group in Brazil. After his departure, Abilio began to seek new investment opportunities.
Supported by other shareholders of BRF, Abilio bought something around 5% of the company, and was elected president of the company's board. The new group began a restructuring in the company, transforming an industrial-centric mentality to a consumer-driven strategy.
Based on BRF competitive advantages, such as strong brands, diversified product portfolio, unique manufacturing model and extensive distribution capacity, this new group has pursued a new frontier of growth. With its new strategic positioning -- greater focus on consumer rather than manufacturing -- BRF is now seeking further advancement in international sales, and a consolidation of its Brazilian leadership.
The new strategy is paying-off. BRFs net revenue over the first 9 months of 2014 reached BRL23.0 billion, an increase of 3% compared to the same period of 2013. Despite this slight increase in net sales, BRF was able to increase its net margin from 4% to 5%, resulting in a net profit of BRL1.2 billion in the period, a 41% growth.
Abilio Diniz, one of the greatest entrepreneurs of Brazil is investing in the future of BRF. Investing now, will ensure to you similar conditions to Abilios investment. This is a rare opportunity to follow the investment of one of Brazil best entrepreneurs.
From a small slaughterhouse in Goias to 300,000 customers in 150 countries
JBS is currently the largest meat producer in the world. The company operates in the processing of beef, pork, lamb and chicken, and leather processing. Currently, JBS has more than 300 production units around the world employing over 185,000 people. Amazing to see where JBS arrived, knowing that the company was born 60 years ago as a small slaughterhouse in Goias.
The turning point in JBS history was its 2007 IPO. After its capital raising, JBS went into a series of acquisitions, such as Swift, Pilgrim's Pride (NASDAQ: PPC), Bertin, Seara, to name a few. This aggressive strategy allowed JBS to expand its physical operation for more than 20 countries, ensuring not only the strategic diversification into other types of meat but also raw material supply from different geographies, something very important to mitigate sanitary risks that may affect the companies in this market.
The main competitive advantages of JBS are (i) market leadership, ensuring economies of scale and well recognized brands, (ii) a diversified business model with global reach, (iii) extensive distribution chain serving clients around the world, and (iv) an experienced management team.
Developed countries have been looking for a healthier diet, in many cases resulting in a higher consumption of proteins. Also, an increase in consumption power in emerging markets results in people looking for better food. Both cases, represents a huge opportunity for JBS.
If you believe in this trend, JBS is one of the best investment opportunity for you. Company figures reinforce JBS leadership in its market -- estimated 2014 revenues is $50.0 billion, and 2014 net income already surpass 2013 full-year number.
JBS is starting to generate cash in an unprecedented pace, allowing the company to reduce its leverage and present better results for its shareholders. As a reflection of the improvements in financial results, JBS stock has appreciated 48% during 2013, and additionals 31% in 2014. Despite the good stock return over the past two years, JBS is still a good business at a reasonable price. After years building this great company, the financial results and shareholders return has just begun.
Foolish Bottom Line
Investing in the meat industry is one of the best alternatives to invest in Brazil. This is a market where Brazil offers clear competitive advantages, and domestic companies have achieved manufacturing excellence over many years. Both BRF as JBS are leading international companies, and have a great management team with an ambitious growth plan.
Enjoy your holiday dinner, and reflect on the Brazilian investment opportunities in the food market. Your next investment opportunity may soon be on the tip of your tongue.
The article Finding Your Next Stock At Your Christmas Dinner originally appeared on Fool.com.
Michel Glezer has no position in any stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.
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