Food & Beverages in an Age of Tech Euphoria

This Quick Take is simple. We think the market is in the process of transferring wealth from the impatient to the patient[1]. Amidst a haze of get-rich-quick stories we are pounding the table for caution and patience. We admit that “pounding the table” to stay calm and be careful sounds a little ridiculous. But hear us out.

Our Charts for the Curious section is filled with charts highlighting the speculative frenzy in high flying and money-losing firms today. Our extensive library of work shows that history is unambiguous about such fads. They end. Badly.

Are Treasury Protected Inflation Securities the Only Option?

Earlier this year we did a deep-dive into what worked and didn’t work during the inflation of the 1970’s. The conclusions were as compelling as they were intuitive. Investors did well investing in companies that made stuff people need. Later research showed that investors following the crowds faced a “duration” crisis.

Low interest rates and lax lending standards have left safety and income oriented investors with limited options. In his Margin of Safety Book, Legendary value investor Seth Klarman noted that “…when interest rates are unusually low, investors should be particularly reluctant to commit capital….”[2] His rationale being that you cannot be certain rates will remain low.

Friday’s headlines were dominated by soaring food inflation. On Monday this week, U.S. Treasury Secretary Janet Yellen announced higher inflation and higher rates would be good for the country. Despite this, investors have never been less interested in stocks that benefit from inflation.

The chart below is a great example. Food. Drinks. We think people will buy that stuff in good times and bad. The companies that make them have never had lower representation in the index than today.

The Best Hedges Against Inflation Among Equities

The next chart shows the incredible payoffs to those who stuck to the basics. The patient.

YOU ARE NOW READING BASIC MEMBER LEVEL CONTENT

The chart shows the period from 1969 until the inflation of the 1970s was broken.  The navy blue line is the compound return of a dollar invested in the S&P 500 food and beverages sector.  The light blue line is the S&P.   As year over year price increases soared, food and beverage stocks fared well.

  1. As a reminder for our Financial Advisors: our models are available on a continuous basis, and most have been in production for over a decade.  If you are looking for simple, concentrated, low turnover, and tax efficient model portfolios we would like to talk with you.  KCR also offers a wide range of easy-to-use but sophisticated tools.  Our toolkits can help identify mispriced stocks with the best and worst risk/reward characteristics, estimate a stock’s duration and warn you when a company is engaging in low-quality accounting. Over the last 12 years, KCR has built and offers time-tested and class-leading products built by experienced and proven money managers for fixed to low prices.
  2. Kailash Capital’s sister company, L2 Asset Management, runs market neutral, long/short, large-cap, and mid-cap long-only portfolios with a value and quality bias.  L2 employs a highly disciplined investment process characterized by moderate concentration, low turnover, high tax efficiency, and low fees. While nobody can predict the future, we believe the recent resurgence in risk-adjusted returns seen across all products is the beginning of what may be a long period where speculation is punished, and prudence and patience rewarded.
The topics discussed in this article are aimed at seasoned professionals, as such, we have included some extra reading for anyone seeking out more information related to the topics above.

Disclaimer

The information, data, analyses, and opinions presented herein (a) do not constitute investment advice, (b) are provided solely for informational purposes and therefore are not, individually or collectively, an offer to buy or sell a security, (c) are not warranted to be correct, complete or accurate, and (d) are subject to change without notice. Kailash Capital, LLC and its affiliates (collectively, “Kailash Capital”) shall not be responsible for any trading decisions, damages or other losses resulting from, or related to, the information, data, analyses or opinions or their use. The information herein may not be reproduced or retransmitted in any manner without the prior written consent of Kailash Capital. In preparing the information, data, analyses, and opinions presented herein, Kailash Capital has obtained data, statistics, and information from sources it believes to be reliable. Kailash Capital, however, does not perform an audit or seeks independent verification of any of the data, statistics, and information it receives. Kailash Capital and its affiliates do not provide tax, legal, or accounting advice. This material has been prepared for informational purposes only and is not intended to provide, and should not be relied on for tax, legal, or accounting advice. You should consult your tax, legal, and accounting advisors before engaging in any transaction. © 2021 Kailash Capital, LLC – All rights reserved.

Nothing herein shall limit or restrict the right of affiliates of Kailash Capital, LLC to perform investment management or advisory services for any other persons or entities. Furthermore, nothing herein shall limit or restrict affiliates of Kailash Capital, LLC from buying, selling or trading securities or other investments for their own accounts or for the accounts of their clients. Affiliates of Kailash Capital, LLC may at any time have, acquire, increase, decrease or dispose of the securities or other investments referenced in this publication. Kailash Capital, LLC shall have no obligation to recommend securities or investments in this publication as result of its affiliates’ investment activities for their own accounts or for the accounts of their clients.

June 9, 2021 |

Categories: Quick Takes

June 9, 2021

Categories: Quick Takes

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