Wednesday, February 3, 2016

31st AIM equity update by Mark Lakowske, Calavo Growers (CVGW): A stock that's green and growing!

Calavo Growers, Inc. (CVGW $50.43)
Tableside Guac as a Promising Stock?

By: Mark Lakowske, AIM student at Marquette University

Image result for calavo growers logo 

Disclosure: The AIM Equity Fund currently holds this position. This article was written by myself, and it expresses my own opinions. I am not receiving compensation for it and I have no business relationship with any company whose stock is mentioned in this article.

Summary
• Calavo is leading the guacamole craze across the United States
• The company's profitability is on the rise
• This is a resilient stock during these past few volatile weeks
• There is a flood of new institutional investors in the stock

Calavo Growers, Inc. (CVGW) is one of those companies that most consumers have not heard of—unless you happen to be an avocado aficionado. Odds are favorable that you have had consumed a Calavo avocado whether you know it or not. Ever buy an avocado from Whole Foods? Ever order guacamole from Qdoba? Ever get guacamole on your burger at a Chili's? All of those stores and restaurants are Calavo’s customers. Calavo also sells salsas and other pre-packaged meals and salads along with its avocado business. I tend to focus more on their avocado business because that’s where the money is at for the company.

The demand for avocados has been consistently on the rise for the past four years. According to the Haas Avocado Board, 1.137 billion pounds of avocados shipped across the world from California, Mexico, Chile, The Dominican Republic, and New Zealand in 2011. In 2015, there were 2.181 billion pounds shipped—an impressive growth rate of 91.82% in only four years.

The consistent growth in avocado demand has fared well for Calavo’s profitability. Return on equity and return on assets has jumped from the low single digits to low teens in the most recent quarterly report. Calavo’s farmers have had to become more innovative in order to avoid adverse effects from the drought in California. They have improved their farming techniques so their trees do not require as much water to grow. This has led to better margins within the company—increasing roughly 10% in 2015.

What has the stock done lately?

To say the equity markets are off to a shaky start in 2016 is an understatement. Only two sectors in the S&P 500 are in the black YTD. Since the start of 2016, the S&P 500 is down 8%, the Dow is down 8.8%, and the Russell 2000 (where CVGW is listed) is down a whopping 12.19%. In the same time period, CVGW is up 3%! With some analysts worried about a possible recession in 2016, a stock in the black is going to be hard to come about. In 2015, Calavo’s stock appreciated 22%. CVGW’s stock vastly outperformed its peers in 2015. $FDP rose 14%, $CAG improved 6%, and $HAIN tumbled 38%.

Past Year Performance: 2015 was a stellar year for Calavo Growers. Sales were up 9.5% from 2014, net income ripped up from 0.10 in 2014 to 27.20 in 2015, and gross margins are currently above the historical five year average. As mentioned before, the stock appreciated 22% in 2015 and short interest remained in the low single digits.



Source: FactSet

My Takeaway
Although this recent market correction and increased volatility has some investors scared for the near future, Calavo Growers, Inc. is a great option for portfolio diversity. The company has worked out some kinks in management in the past year and institutional investors are starting to pour money into the company. 

Over the past six months, the top fifteen institutional shareholders have increased their position over 1 million shares. Lord, Abbett & Co. recently increased their stake in CVGW by 433,000 shares. If Calavo keeps on performing like they are now and demand remains as stable as it has in the past, I would expect the stock to grow another 15, and maybe, even 20% in 2016.



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