High-Protein Portfolios
By James K. Glassman, Washington Post, Sunday, January 18, 2004; Page F01
http://www.washingtonpost.com/wp-dy...-2004Jan17.html
As the new year begins, some folks are resolving to lose weight by going on the Atkins diet.
Other folks are resolving to make money by buying stocks of companies that benefit from the Atkins diet.
The Atkins diet was introduced in a 1972 book by Robert Atkins, a New York cardiologist who argued that the best way to lose weight was to shun carbohydrates, abundant in foods such as rice, bread and fruit, and embrace proteins and fats, found in meat, eggs and cheese. "If you cut out carbohydrates, you automatically burn stored fat. That's the basic principle. It's been known about for 35 years," Atkins said in an interview two years ago.
But in a nation where heart disease is the top killer and fat is assumed to be the guilty party, the Atkins diet was largely considered an eccentricity -- until recently. Last year, partly because new research started showing the effectiveness of a low-carb diet, the Atkins system became white-hot. Newspaper and magazine editors voted its resurgence the No. 2 food story of the year -- after the obesity epidemic, to which it is not unrelated.
Atkins himself slipped on an icy sidewalk last April, took a nasty fall on his head and died nine days later. But the low-carb diet continues to thrive -- both in its Atkins incarnation and in variations, including Protein Power, The Zone and, biggest of all, the South Beach diet, developed by another cardiologist, Arthur Agatston, whose book on the subject has quickly sold 4 million copies. "Dr. Atkins' New Diet Revolution," which is just one tome in the Atkins library, has sold 10 million copies and has been on the New York Times bestseller list for five years.
While the Atkins diet has its detractors, who often caricature it as a frivolous, all-you-can-eat steak-and-martini regime, it has clearly changed the way Americans eat. Sales of eggs, which are condemned in low-fat diets for being high in cholesterol, have surged. Sales of orange juice, which Atkins followers avoid because it contains 26 grams of carbs per cup, have fallen. Sales of Diet Pepsi (0 grams of carbohydrates) are up 7.6 percent, while sales of regular Pepsi (39 grams per can) are down 1.8 percent.
Can investors profit from the low-carb craze?
Many already have. Consider an obscure company called John B. Sanfilippo & Son (JBSS), with a market capitalization of about a half-billion dollars. Sanfilippo, founded in 1922 by an Italian immigrant in Chicago, is in the nut business, and nuts -- to the delight of many Atkins followers, including me -- are not merely acceptable on a low-carb diet, they are positively desirable. No nuts has been the rule for many low-fat diets, but Atkins encourages you to eat them as snacks, and the fattier the nut (macadamias, for example), the better, because a low-fat nut is a high-carb nut.
Backed up with citations from the scientific literature, the Atkins Web site states flatly: "People who eat nuts regularly are less likely to have a heart attack than people who do not consume nuts and oil-containing seeds. Moreover, the greater the frequency of consumption, the lower the incidence of heart attack."
All of this is very good news to the management of Sanfilippo, which processes, packages, markets and distributes nuts of all kinds. Brand names include Texas Pride, Evon's and Fisher, the last of which, in desiccated form, are often tossed to passengers by hurried flight attendants. On the strength of a powerful increase in sales and profits, Sanfilippo stock last year quintupled in price.
By contrast, consider Monterey Pasta (PSTA), which sells pasta and sauces, mainly through Costco and Wal-Mart's Sam's Club. With low-fat diets, you could eat practically all the spaghetti and rigatoni you wanted, but Atkins reminds followers that there are about 20 grams of carbs in every half-cup of pasta. Risotto, linguine, egg noodles -- they're all Atkins no-no's. Sales by Monterey to Costco were down by more than one-fourth in the last quarter, and earnings were crushed -- off 87 percent. As a result, the stock is down 16 percent for the year ended Thursday, trailing the market as a whole by 40 percentage points.
Also hurt by the Atkins excitement are companies such as Panera Bread (PNRA), a chain of bakery-cafes. A croissant carries 27 grams of carbohydrates; two pieces of Italian bread, 30 grams. Interstate Bakeries (IBC), which makes Sunbeam and Wonder bread, has also suffered, but it's a firm with problems in addition to the Atkins diet, including a weak balance sheet and strong unions.
But let's get back to Sanfilippo. It's one of the few pure Atkins plays. Atkins Nutritionals Inc. itself, the company founded in 1989 to market paraphernalia under the Atkins brand (including vitamins and low-carb foods, most of which taste like the cardboard that comes with your shirts), is private. Cheese (a tablespoon of cheddar contains one-tenth of a gram of carbs), which, like nuts, has become acceptable to dieters after decades as a forbidden fruit, is either made by small private firms or is a relatively small source of revenue for huge food-processing companies. It represents less than one-third of all sales even for Kraft Foods (KFT).
But Sanfilippo is a strictly nutty business. Its recent 10-K filing with the Securities and Exchange Commission declares that it sells "peanuts, almonds, Brazil nuts, pecans, pistachios, filberts, cashews, English walnuts, black walnuts, pine nuts and macadamia nuts" (a list that reminds me of Christopher Guest's great soliloquy in the movie "Best in Show"), and it has prospered lately because of the low-carb mania.
Sales rose 30 percent in the most recent quarter (ending Sept. 25, 2003), and net income more than quadrupled. For the fiscal year ending last June, earnings per share were $1.63, compared with 84 cents in 2002. "There is definitely a substantial increase in the consumption of nuts," says Jasper B. Sanfilippo, the company's chief executive. And the reason is no mystery: It's the wild success of the late Dr. Atkins.
Unfortunately, the newfound prosperity of Sanfilippo is no secret, and investors have already responded to it. The stock went from $10 a share at the start of 2003 to $49 on Thursday.
Careful readers of this column may have seen an enthusiastic reference to the company in March, when it was trading at $14.79. Back then, when it was recommended by Jim Collins, whose OTC Insight ranks No. 1 among all newsletters tracked by the Hulbert Financial Digest over the past 15 years, Sanfilippo's price-to-earning (P/E) ratio was a mere 11. Today, it's 22, still modest for a company that's expected (by the only analyst who covers it) to increase profits by more than 50 percent this year.
Collins is currently recommending another Atkins company, Cal-Maine Foods (CALM), which I included last month on my list of 10 stocks for 2004. Cal-Maine sells eggs -- 571 million dozen of them last year -- to retailers. Two eggs contain only one gram of carbs. The limit on carbs per day on the Atkins diet varies, but for moderate and sustainable weight loss it's around 50 grams (one and a half bagels) or, for vigorous exercisers, up to 90 grams.
Egg commodity prices have been soaring (up from $1.15 in July to $1.56 in December, according to the Department of Agriculture), and, for the quarter ended Nov. 30, Cal-Maine's revenue rose 58 percent and its earnings per share jumped from 17 cents to $1.28. No analysts cover the stock, and I wouldn't want to venture a guess on next year's profit, but it's not hard to see why Collins likes the current P/E ratio of just 10. Cal-Maine stock fell by half from the date of its initial public offering in 1996 to the end of 2002. Since then, it has zoomed from $3.55 to $31.50 on Thursday.
Other Atkins companies? The largest category is producers of meat, which, with a few exceptions such as liver, contains no carbs at all. Meat consumption has been rising, undeterred even by the mad cow scare and, with higher demand, prices are way up. Ground chuck prices have increased 20 percent in the past six months. The beneficiaries are stocks such as Tyson Foods (TSN), the world's largest processor of beef, chicken and pork products, and Smithfield Foods (SFD), with $2.2 billion in sales. But, in general, meat-producer shares have moved up only modestly, perhaps because Atkins has not had such a dramatic effect on their sales as it has on sales of eggs and nuts.
Restaurants that stress meat haven't benefited excessively from Atkins either, mainly because they also stress bread, as in hamburger rolls. Some chains, including Hardee's, a division of CKE Restaurants (CKR), are offering burgers wrapped in lettuce. And Burger King, a private company, last week started selling bunless sandwiches in plastic salad bowls, to be eaten with knife and fork -- which sounds like a mess.
Let's return again to Sanfilippo, the most Atkinsesque of all investments. There are some drawbacks. For one thing, nepotism abounds. Read this excerpt from the 10-K: "Jasper B. Sanfilippo, Chairman of the Board and Chief Executive Officer and a director of the Company, is (i) the father of Jasper B. Sanfilippo Jr., an executive officer of the Company, and Jeffrey T. Sanfilippo, an executive officer and a director of the Company, as indicated above, (ii) the brother-in-law of Mathias A. Valentine, President and a director of the Company, and (iii) the uncle of Michael J. Valentine who is an executive officer and a director of the Company and James A. Valentine, an executive officer of the Company, as indicated above."
Still, the family surely knows the business. Jasper's father, John, founded it, and Jasper has run it since 1963. (Jasper's 44,000-square-foot home, northwest of Chicago, also contains the world's largest Wurlitzer organ, but that's another story.) Another problem is that, while the company is paying off its loans with those additional profits, the balance sheet is not a thing of beauty, with $3 million in cash, $11 million in short-term and $22 million in long-term debt.
But the real risk resides in Atkins. How long will the low-carb craze last? Or, more precisely, is it a short-term fashion or long-term trend?
If you think fickle dieters will move on to something else, as they always have, then perhaps the best Atkins play is to forget Sanfilippo and instead buy shares of companies that have, so far, been hurt by Atkins -- in anticipation of a turnaround.
One way to have it both ways is to invest in American Italian Pasta (PLB), which has long been admired for its strong management and profits that rise in a Beautiful Line. The company sells $440 million worth of pasta a year under such brand names as La Bella and Mueller's, but, unlike Monterey, it moved quickly to get a piece of the action by developing a low-carb line of Atkins-branded pasta. American Italian trades at a P/E of 16, and earnings are expected to grow about 15 percent over the next year.
Those meat processors present a similarly hedged opportunity. If Atkins really takes off, meat sales should increase substantially, but even if Atkins languishes, the meat stocks shouldn't be hurt much since sales haven't risen much either. In the long run, however, as developing nations get richer, the appetite for meat will only increase.
The tough decisions involve the purer Atkins stocks: Sanfilippo and Cal-Maine. After such huge runs, can they go even higher? Here, I am sorry to say, you are on your own. The only hint I'll give is that, as an Atkins aficionado myself (I lost 18 pounds; then, after my friends kept asking me if I had some disease, I gained about half back), I believe that the basic concept -- too many carbs are worse than too much fat and protein -- will endure.
James K. Glassman's e-mail address is jglassman~aei.org. He invites comments and questions but can't answer them all.
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