- The No. 1 question Americans are asking right now.
- It has absolutely nothing to do with Trump.
- But it’s shaping the future for one industry in particular.
- Also recommended: Trump-fueled retirement blueprint [only 5 stocks]
Every day, Americans ask themselves a question of critical importance.
No, it’s not political. It has nothing to do with Trump. Or the stock market. Or global warming.
The $50 billion question is: To eat it in or out?
According to the U.S. Census Bureau, Americans spent $54 billion out at restaurants and bars, compared with $52 billion on groceries, between 2015 and 2016.
For the first time in history, eating out beat cooking meals at home.
However, the trend quickly reversed.
Restaurants have endured painfully slumping sales over the last year — with no end in sight.
But as senior analyst Jonathan Rodriguez points out, one smart food services company just made a huge pivot that could line investors’ pockets with profits.
Ahead of the tape,
Chief Investment Strategist, Wall Street Daily
Shifting Sands… Shifting Profits
Pause, rewind, fast-forward.
The restaurant business is one of the toughest to be in these days.
Fixed costs — like food, labor and marketing — have all risen. Yet foot traffic has declined.
That’s not surprising, given persistently low inflation in grocery goods.
And with more than 620,000 restaurants operating around the nation, competition is stiffer than ever.
Many restaurants — even some of the biggest brand-name chains — are lucky to bag middle single-digit profit margins.
That’s not to say there isn’t money to be made in dining — for businesses and their investors.
The simple truth is that in the food services industry, it’s more profitable now to sell food to restaurants and grocers than it is to operate a dining establishment.
Bad news for restaurants, but great news for producers.
Bob Evans Farms Inc. figured this out fast enough to not only survive the shift but also position itself favorably as a nimble small-cap firm in a growth industry.
Here’s how they’ve done it…
Going Lean to Make Green
Headquartered in New Albany, Ohio, Bob Evans has been in the food business for nearly seven decades.
The company got its start with full-service restaurants in the 1960s.
And over time, Bob Evans expanded and diversified into the packaged food industry — selling its signature sausages and sides to grocery retailers.
Unfortunately, over the last 10 years, the restaurants for which Bob Evans is well-known became the monkey on its back…
Restaurant revenue peaked in 2008 at $1.8 billion and has declined 2% in the last five years.
In fact, Bob Evans’ dining revenues have declined year over year in six of the last 10 years.
On the other hand, its packaged food line, BEF Foods, has shown incredible growth.
Since 2012, BEF Foods’ annual sales are up 24%.
Better still, the BEF segment is currently posting an 18% operating profit margin — five times higher than the restaurant end of the business.
So on intense activist pressure over declining sales and profits, it sold off the dining business for $565 million to private dine-in restaurant firm Golden Gate Capital in May.
It used the proceeds of the sale to pay down debt and will pay out a special dividend.
To beef up its packaged side-dish offerings, the company also acquired Pineland Farms Potato Co. for $115 million.
Now Bob Evans is poised for tangible growth.
Value, Value Everywhere
Much like its famous sausages, Bob Evans is chock-full of value…
Earnings per share are expected to fall this year with the various M&A and sale charges but are forecast to nearly double by the end of fiscal 2018.
Per the stock’s forward earnings multiple of 27, that implies upside of about 13% from its current level.
The stock also trades at a forward enterprise value-to-sales ratio of 3.6 — less than half the industry average.
And company carries far less debt than its peers. It has a debt-to-equity ratio of 1.5, compared with a whopping 6.3 for the industry.
Best of all, the stock sports a 2% yield with a free cash flow payout ratio of just 44%.
Speculators might even consider the slightly out-of-the-money December $72.50 call option trading around $5.45.
The option breaks even when the underlying shares rise to $77.95 and doubles in value around $83.50.
Bottom line: At more than $50 billion, the business of food is still booming. And Bob Evans’ pivot to profitable producer from cash-draining dining company offers small-cap investors a big opportunity.
On the hunt,
Senior Analyst, Wall Street Daily
Three Trends for the Next 50 Years
I’m not a big believer in the future. I mean, it will exist — we know that. But that’s about it.
CXO Advisory Group has analyzed the predictions of hundreds of pundits. Are the talking heads on TV right or wrong? You know, the ones who say Ebola will end the world, or the ones who said Enron was just having accounting problems.
It turns out the pundits’ predictions are right only 47% of the time.
I think they are being nice to the pundits. I would say pundits are right about 12% of the time. But I pulled that number out of a hat, and they did a statistical study. So who knows?
I don’t like making predictions. They get in the way of my digestion. All of that future thinking clogs up the pipes.
But there’s a great way to evaluate whether a prediction is true or not.
It involves a simple phrase we all know: “This time things will be different.” We know that phrase is always wrong. We know that things stay the same.
I’ll give a great example: My 15-year-old doesn’t have email. She doesn’t really use a computer except for homework. But she does use her phone. She texts everyone.
Email has been popular for almost 20 years. But the phone has been popular for over 100 years.
Not that new things are bad. We’re not using the phone from the year 1900. We’re using a phone that is a more powerful computer than the top supercomputers from 20 years ago, and it fits into our pocket.
Two things happen:
- What was popular in the past will be popular for at least as long in the future (expect at least another 100 years of teenage girls texting relationship advice to their friends)
- And what was popular in the past will improve.
I have two experiences as a pundit for the future.
In 2007 I said on CNBC that Facebook would one day be worth $100 billion. At the time it was worth maybe $1 billion. Everyone on the show laughed. I then invested in every Facebook services provider I could find.
And in my book Choose Yourself, written mostly in 2012 but out in 2013, I said that we can look forward to having a “smart toilet” that will diagnose all of our illnesses in our fecal matter and urine… a mini-lab in our bathrooms.
Anyway, recently, MIT said it’s working on just such a toilet. Cost: $2,000, but it was going to bring the cost down to $100. Count me in.
But there are three trends from the past 100 years that I think are important to respect and will be important trends for the next 100 years. Knowing this can help us make money off of them.
Trend #1: Deflation
Most people are scared to death of inflation.
If most people are scared of something (like Ebola), it probably means it was a media- or marketing-manufactured fear that will never come true.
The reality is we live in a deflationary world.
Warren Buffett has said that deflation is much scarier than inflation. It’s scary to him because he sells stuff. It’s great for everyone else because we buy things. However, to be fair, it’s a mixed bag.
When prices go down, people wait to buy, because prices might be cheaper later. This is why some of the scariest points in our economic history were in the 1930s and in 2009, when there was deflation.
How did the government solve the problem? By printing money and going to war. That’s how scary it was. To solve the problem, we gave 18-year-old kids guns, sent them to another country and told them to shoot other 18-year-olds.
People have all sorts of statistics about the government debt and the dollar decreasing 97% in value since 1913, etc.
I don’t care about all of that. I want to make money no matter what.
Here’s what I see: My computers are cheaper. Housing prices haven’t gone up in 10 years. And people are finally starting to realize that paying for higher education isn’t worth as much as it used to be (too much student loan debt and not enough jobs).
All electricity is cheaper. All books are cheaper. And I don’t have to go to the movies to watch a movie. All my music is basically free if I watch it on YouTube.
Don’t get me wrong: Inflation exists because the government and the corporations that run it are preventing deflation. But the natural order of things is to deflate. Eventually, something bad will happen and the carpet will be pulled out from under everyone. Perhaps if we have an inflationary bubble. Then deflation will hit hard, and you have to be prepared.
In a deflationary world, ideas are more valuable than products. If you have ideas that can help people improve their businesses, then you will make a lot of money. For instance, I know one person who was sleeping on his sister’s couch until he started showing people how to give webinars to improve their businesses. Now he makes seven figures a year.
This “webinar trick” won’t always work. But then he’ll have ideas for the next way to help people.
Ideas are the currency of the 21st century, and their value is inflating, not deflating.
Trend #2: Chemistry
The last 50 years was the “IT half-century,” starting with the invention of the computer, the widespread use of home computers and then the domination of the internet and mobile phones.
It’s not like innovation will stop in that area. It won’t. Every year computers will get better, more apps will be useful, etc. But the greatest innovations are over for now (DNA computing will happen, but not until after what I’m about to say does).
As an example: The next versions of my laptop and my cellphone have already come out. But for the first time ever, I have no real need to get them. And I’m an upgrade addict. But the upgrades just weren’t big enough. I don’t even think I understand the differences between the next generation of cellphones and last year’s generation (tiny changes in battery and pixel numbers, but only tiny).
Here’s what’s going to change: chemistry. The number of grad students in chemistry is at an all-time low versus the number of grad students in computer science or information technology.
And yet we’re at a point where almost everything we do requires advances in chemistry rather than IT.
For instance, Elon Musk is creating a billion-dollar factory to make batteries. Well, for Elon’s sake, wouldn’t it be better if we had a more efficient way to use lithium, so that batteries can last longer?
DNA computing, while it would create a great advance in computer technology, is almost 100% dependent on advances in biochemistry.
Many people call the U.S. the “Saudi Arabia of natural gas.” But what good does it do us if we can’t convert the gas into liquids that fill up our car? Right now every country uses Fischer-Tropsch technology — a chemical process that is 90 years old — to turn gas into liquids. And it’s expensive to use it. Wouldn’t it be better if someone could develop a groundbreaking change here?
I can list 50 problems that chemistry can solve that would make the world better. But it’s not sexy, so people have stopped studying it. This will change. Not because it’s a futurist trend, but because for 3,000 years, changes in society were largely due to chemistry advances (e.g., harvesting wheat) rather than computer advances. I’m just taking an old trend and saying, “Hey, don’t forget about it. We still need it.”
Trend #3: Employee-free Society
Before 200 years ago, we never really had employees. Then there was the rise of corporatism, which many confused with capitalism.
I’m on the board of a $1 billion in revenue employment agency. It’s gone from $200 million in revenues to $1 billion just in the past few years. Why did we move up so fast when the economy has basically been flat?
For two reasons:
1. The Pareto principle, which says that 80% of the work is being done by 20% of the people. So a lot of people are being fired now, since 2009 gave everyone the carte blanche excuse.
2. Regulations that are too difficult to follow. It’s getting pretty difficult to figure out what you need to do with an employee. Health care is a great example, but there are 1,000 other examples.
So what’s happening, for better or worse, is a rising wave of solo-preneurs and lifestyle entrepreneurs — exactly what happened for the hundreds of years that capitalism was around before stiff and rigid corporatism (teamed with unions) became the primary but fake “stable” force in our lives.
This is why companies like Uber are flourishing. You have a workforce (the drivers), logistics software in the middle and people willing to pay for that workforce. Our GDP and our startups are going to start to drift in the Uber direction. Uber in San Francisco last month did three times as many rides as all the cab drivers in SF combined.
Corporate life was never really stable, and now we know that.
The problem is while we were all in our cubicles (and I’ve been guilty of this for many years as well), we stopped being creative, stopped having ideas and just took orders from the gatekeepers: bosses, colleagues, government, education, family.
We let other people choose what was best for us instead of doing the choosing ourselves. If you let someone else do the choosing for you, the results won’t be good, and you’ll get resentful. Bad things will happen.
I don’t have a direct stock tip on this. This is not about stocks. It’s about taking an approach where you get your life back so you can have wealth and abundance over the next 50 years.
One thing to try is to write down 10 ideas a day. This exercises the idea muscle and gets you 100 times more creative than the average person over time. They could be business ideas, ideas to help other businesses, book ideas or even ideas to surprise your spouse. Another trick is to take Monday’s ideas and combine them with Tuesday’s ideas.
Ideas are the true currency of this next century. I don’t care about the dollar or gold or health care. Any movement in those will just create opportunities for people who know when to take advantage of them. The key is to become an idea machine.
People say, “Ideas are a dime a dozen,” or, “Execution is everything.” These statements are not really true. It’s difficult to come up with 10 new ideas a day (try it), and execution ideas are just a subset of ideas.
The ideas above are already affecting our society, and being ready for them will be the key to success in the coming years.
– James Altucher