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Food analyst gets the contrarian calls right

When some equity analysts talk, you get the impression that picking winning stocks is a matter of mathematics, check lists and stock screens. When you listen to Tim Ramey, you get the feeling it's an art form.

"For me, it's a light bulb going off over my head. I look for inspiration. It's a different thing every time," said Mr. Ramey, a Lake Oswego, Ore.-based food and beverage analyst for northwestern U.S. investment bank D.A. Davidson & Co. "There has to be something that lights my fire, because I have to tell a story. Ultimately, I'm a storyteller."

He might not have what anyone would call a system, but it's hard to argue with the results. Mr. Ramey lands first among StarMine Corp.'s rankings of 37 North American food-products analysts, based on the performance of his stock recommendations for the past 12 months. Data compiled by StarMine - a stock market analytics service owned by Thomson Reuters - show that Mr. Ramey's recommendations generated excess returns of 18.3 per cent above the overall North American food products sector over the past year, well ahead of second-ranked Scott Van Winkle of Canaccord Genuity (15.1 per cent).

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And it wasn't just one good (or lucky) year, either. Mr. Ramey also ranks second in the sector for performance of his picks over the past 24 and 36 months.

"He's picked not one but several winners that have outperformed their peers in the past year," said Tim Gaumer, director of fundamental research at Thomson Reuters. "He gets the contrarian calls right - and before the pack."

Mr. Ramey said he's just doing what he's paid to do.

"Davidson really is all about stock-picking. I'm compensated fairly heavily on my stock-picking abilities," said the 26-year veteran of sell-side stock analysis. "We don't make sweeping sector calls, we don't try to be thematic. We take rifle shots at specific ideas."

StarMine's industry excess returns ratings use each analyst's stock recommendations to create a "long-short" investing strategy - mimicking the effect of going long on stocks the analyst rates "buy" and shorting the stocks he or she rates "sell". This way, the analyst gets credit for both "buy"-rated stocks whose returns exceed the overall industry benchmark, and "sell"-rated stocks whose returns underperform the benchmark. (Stocks rated "strong buy" or "strong sell" are awarded double credit; ratings of "hold" or "neutral" receive no score.) StarMine's data show that when Mr. Ramey has had a food-products stock rated "buy" or better during the past year, it has risen an average of 47 per cent. When he has had it rated "hold" or lower, the average return has been 10 per cent.

"It's when he turns positive on a stock that he distinguishes himself," Mr. Gaumer said.

A case in point is Mr. Ramey's timing on Smithfield Foods Inc. - a Virginia-based pork producer that is on the rebound after overcoming debt troubles, weak markets and heavy losses that had some people wondering whether it was headed for bankruptcy. The stock was up 63 per cent in the past year when he had it rated a "strong buy," versus a combined loss of 11 per cent when he had it as a "hold" or "sell".

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"It was interesting that he became more bearish than his peers on the way down - then at the bottom, he turned bullish," said Mr. Gaumer. "It's tough to recognize capitulation when you're in the midst of it. But he got it right."

Mr. Ramey doesn't dismiss the importance of crunching a company's financial numbers. But for him, that's only a small part of stock picking.

"A rigorous analysis of the balance sheet and the income statement and building a model, that's two points out of a 10-point scale of what an analyst should do," he said. "Those factors are necessary but not sufficient to understanding a business."

"Leadership matters," he said. "Culture matters."

He likes his current top pick, San Francisco-based snack maker Diamond Foods Inc. , despite the fact that the stock carries a rich valuation of more than 28 times its trailing-12-month earnings. He said it was the company's troubles that convinced him they were worth buying.

"They have high-class problems - like 'How do we raise production lines fast enough to keep up with demand?'" he said.

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The company has been "dramatically increasing" distribution of its Kettle brand potato chips, which the company acquired about a year ago, opening up new growth opportunities. And unlike many food producers, Diamond isn't facing big increases in its commodity input costs this year - big crops for its key almond and walnut products will actually result in "flat to lower" costs, he said.

For the industry as a whole, though, "This is going to be a difficult environment for packaged food producers," Mr. Ramey said.

He said most producers have been able to weather the rising prices of agricultural commodities so far, because they have hedging programs in place for the purchases of their inputs. But with a lot of those hedges expiring by the end of 2011, the producers will have to start edging their selling prices upward in the second half of this year in preparation for the expected cost jump.

"That's an expensive thing to do, and it's hard on volumes," he said.

He's leaning toward protein producers such as Smithfield and Tyson Foods Inc. , which have growing exposure to major emerging markets such as China, where the population is increasing and improving its protein intake as it becomes more affluent.

"Protein is one of those categories where there is no decent trade-down," he said. "We don't like to change the amount of protein we eat."

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About the Author
Economics Reporter

David Parkinson has been covering business and financial markets since 1990, and has been with The Globe and Mail since 2000. A Calgary native, he received a Southam Fellowship from the University of Toronto in 1999-2000, studying international political economics. More

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