The Prudent Investor

Two Companies Are Eliminated
May 8, 2007, 7:18 am
Filed under: Consumer Goods, Update

I know that one should never fall in love with a company. I have made that mistake in the past and it has reduced my gains. Nonetheless, there are times when I will root for a company and of the four companies remaining in the list to be considered, the two companies I was rooting for will be removed.

One of the best books I’ve read about equity investing was written by James P. O’Shaughnessy and is titled What Works on Wall Street. You should be able to get a copy in your library, or use the link in the last sentence to get a copy through He looks at numerous factors that affect a stock’s price and although a combination of factors is best, the single most important number to examine is the Price to Sales ratio.

When I look at the four companies in contention, PEP, MKC, SJM, and CPO, I see P/S respectively as 2.96, 1.82, 1.4, and 1.0. The two above the 1.5 mark are PepsiCo and McCormick, so I have decided to remove them from consideration.

My daughter holds a small stake in PepsiCo, which I gave her when she graduated college. I purchased shares of the company long ago and the proceeds contributed towards helping with her college tuition. Pepsico has an excellent DRiP, and I would like to choose a company with a DRiP to be used as an example in this portfolio, but am seeking the best companies for the portfolio I can, and Pepsico does not fit the profile I am seeking.

A wild card in this is that according to Keith Mcarthur, McDonalds is beginning taste tests with Pepsi. This could simply be a way of putting the squeeze on Coke to lower their prices, but if McDonalds is actually considering switching then that would be huge. That knowledge is being left on the table, and I will keep watch over what happens with this.

The other company I would have loved to choose was McCormick. As one who lives near Baltimore, this company has regional relevance to me. Not only that, but I am friends with someone who works for the company as a taster – imagine that, getting paid to taste things.

In another portfolio any of these four companies would be very welcome, and any could successfully be chosen for this portfolio. However, I’ve got to make a decision somewhere along the line, to these two excellent companies are being dropped and next post I will decide between the J.M. Smucker Company and Corn Products International.

Yesterday I made my monthly purchase of three shares of SJW. You can follow the progress of this portfolio, including all of the purchases, by clicking on the Portfolio link to the left.


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