As fear grips the market, investors have been dumping their stock holdings. The FTSE 100 has been trading firmly below 7,000 points. But in the scramble for the safe haven of cash, I think the baby has been thrown out with the bath water.
It’s during such times that savvy investors hunt down stocks where there has been unwarranted carnage. In doing so, however, it’s imperative to avoid a bull trap.
We’ve already seen many mega cap tech stocks in the US recover from their June lows. But for me, this is the sign of a classic bear market rally and I still see significant downside risk here.
Retail in the doldrums
In the bloodbath, one stock has really caught my eye, Associated British Foods (LSE: ABF). Its share price is now trading at levels not seen since 2012.
ABF does face some significant challenges. Last month, its retail division issued a profit warning. True, total sales at the Primark chain are expected to be 40% higher than last year. But that’s mostly due to the fact that all its stores are now open and trading as normal.
On a like-for-like basis, sales this quarter are expected to be 9% below pre-Covid levels. Comparable sales across Europe should fall behind by as much as 18%.
To protect its cost-conscious brand image, Primark has decided not to implement any further price increases. Consequently, operating profit margin in 2023 is expected to be below the 8% projected for the second half of this financial year.
Diversification is key
However, ABF is a lot more than just Primark. Some 60% of its revenues comes from a diversified group of businesses, including grocery, sugar, agriculture and ingredients. Many of these have been thriving in an inflationary environment.
AB Sugar is one of the largest sugar producers in the world. Revenues at this division are significantly ahead of last year, driven by soaring sugar prices.
Of course, like many commodities, sugar prices have come down recently. However, I still believe the fundamentals are good for this sector, particularly with supply side constraints still evident. Indeed, ABF is predicting European sugar demand will remain in excess of production for some time.
It’s a similar story in its grocery division where increased prices should drive revenue growth. Many of its brands are household names, not only in the UK, but across the globe. These include Twinings, Ovaltine, and Silver Spoon.
Keep it in the family
Over half the issued share capital of ABF is owned by the Weston family. The business is on the whole conservatively run with a history of prudent financial management. This, I believe, is a source of strength in the present economic environment.
ABF is a strong, well-capitalised company with net cash of £1.5bn. This financial strength has enabled Primark to advance the inventory purchase of its winter stock in anticipation of supply chain bottlenecks. Primark has also recently launched a new website and is to launch a trial for click-and-collect.
With a proven business model and excellent long-term growth potential across its businesses, I view ABF as a no-brainer buy. That is why, over the last few weeks, I’ve been adding to my position here.
