Monday, March 28, 2016

Review of Select Harvests and why I am adding to my postion

Last June I initiated an investment in Select Harvests which is an almond producer in Australia. Since then the stock is down almost 60%. Nevertheless, a review of the business shows that the company continues to meet its financial goals. Overall almond production is actually up and the management continues to execute on its business plan.

For example the company has lowered debt almost 50%. The company has a couple of initiatives including a biomass plant to burn almond tree trimmings and hull for power. These initiatives will continue to lower costs.

Select Harvests has also initiated plans to secure long term water supplies for their water intensive almond orchards.

I can give several reason why the stock is down. One is that almond prices have decreased around the world. Although this is important short term I do not see it as a long term issue as almond prices like all farm products have volatility in pricing from year to year. The other reason is the decline in the Australian dollar vis-a-vis the US dollar.

Lower Aussie dollar makes Australian assets cheap

Currencies fluctuate all the time based on relative interest rates between countries, how each economy is doing compared to each other, political events in each respective country, etc...Australia's currency has got nailed over the last couple of years because it is a commodity based exporting country. Commodity prices are down as is demand from China due to their slowing economy.

The fundamental business is what I keep my eye on. If I can exchange my currently overvalued US dollars for currently undervalued Australian dollars and then buy a profitable growing business then I will do it everyday.

Most people will not do it because they have a short term mindset and sell out. As I pointed out in my article about stocks being fractional ownership of businesses we must analyze the company on its merits as a continuing enterprise and whether it is still meeting the criteria of why we purchased shares of the company in the first place.

To review the reasoning behind owning Select Harvests is summarized below:

  • Almonds are an important non-animal protein source
  • Almonds are a water intensive crop
  • California is the top producer of almonds (80% of world crop)
  • California is running out of water
  • California politicians are putting pressure on agribusiness to reduce water intensive crops like almonds
  • Demand for almonds will only grow over time
  • Australia is uniquely positioned to capture increased Asian demand for almonds over the coming years
Select Harvests actually has increased sales, earnings, cashflow, and increased their dividend last year. The fundamentals of the business long term are excellent. If one is long term investor in good businesses than this is an excellent time to dollar cost average into Select Harvests. 

As Warren Buffet has said about the stock market. In the short term the market is a voting machine and in the long term it is a weighing machine. What this means is that in the short term emotions rule and long term fundamentals rule. 

In the long term more people will inhabit this earth. The longest trend in history the ascent of man will continue. People will get wealthier and demand for almonds will increase yet the number of places that will be able to grow almonds will shrink. There lies the long term opportunity.

Speaking of California. I am reading a great book about the Boswell family and how they became the kings of cotton in California. It is called "The King Of California: J.G. Boswell and the Making of ASecret American Empire" . It is interesting reading because you realize that farming in California is a very delicate enterprise because of the amount of water that is needed. You will also find out how these farmers came to control the majority of the water rights in the state. That seems like it will probably change over the coming years if the drought conditions continue. 

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