Hog Rendering for “Deep Value”

LONDON ENGLAND 4 December 2006 - We promised you another Deep Value idea today. This one comes from Grant's Interest Rate Observer. Like our cotton producer from Friday, this one will win you little in the way of prestige today. It is, after all, in the business of raising and rendering hogs. A smelly, bloody, low-status enterprise, there are not many mommas in America who hope their children will grow up to be pig farmers. There are not even many communities in America that would welcome one of Seaboard Corporation's (AMEX: SEB) "live production" plants as a neighbor. Most would try to find legal reasons why the business would have to look elsewhere to raise its hogs and cut them up.

You are likely to get few admiring questions about Seaboard at a cocktail party today; but the beauty of buying a deep value company is that it may forestall awkward questions in the future, such as the one posed by your wife: "Honey, what happened to our Super?"

A deep value stock is a hedge against an uncertain future. We can't know what will happen. But when a basically solid company is cheap, the future is not likely to do it much harm. A dot.com, a hedge fund, or a leveraged derivatives position, on the other hand, could find the future very inconvenient. A small turn in the wrong direction could wipe them out. Then, the poor man who invested in them when the going was good - and who enjoyed the approving chorus of numbskulls - will have some explaining to do.

We cannot look into the future, but if you invest in the latest, most fashionable new hedge fund today, the answer you give may be less satisfying than the answer the Seaboard investor is likely to offer:

"Don't worry, honey. I invested it in that hog company. People are still eating hogs."

Let us engage in a little more wild speculation:

It is the year 2015. In the shakeout of 2007, real rates of interest soared... approximately 5,000 hedge funds went broke or went out of business in the credit contraction that followed. China blew up, India too. But the Asian giants got back on their feet and stumbled forward, redirecting their factory output towards their huge home markets. By 2015, they are nearly twice as rich as they were in 2005. As they grew richer, the Chinese did exactly what the Taiwanese did a few years ahead of them - they added more animal products to their diets, especially pork. And Seaboard Corporation increased its exports of pork products during the ten-year period, growing and prospering while the Dow tumbled. In 2006, Seaboard sells for only 6.9 times earnings. Even if the multiple fails to increase, it is not likely to decrease. And if earnings increase substantially over the next nine years, Seaboard stock could be worth considerably more than it is today.

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