The Myth of Stocks as Commodities

 | Jun 02, 2014 | 2:00 PM EDT
  • Comment
  • Print Print
  • Print
Stock quotes in this article:




















Why can't we just say that stocks are cheaper than they seem? Why do we have to be bound by benchmarks and only evaluate stocks as an asset class, something we do when we cite the averages. Sure, the averages are making a nice comeback from earlier in the day, but what matters is what lurks underneath because the accumulation of the evidence, the body of proof, so to speak, is in the pudding of individual stocks and not all the big chatter about overall earnings that might make stocks look expensive at 17x earnings.

First, why is this so important? Because in the last two decades we have seen a terrible thing happen to stocks. They have become total commodities, meaning they are viewed as a unit. They trade like corn or like wheat. This kind of analysis diminishes the value of so much of what happens at companies. There is an ineluctable circular reasoning concept at play here. If stocks are commodities, then what's the difference? Are bushels of wheat different? Are corn stalks different? You would be crazy to think they are. They are meant to be homogenized. It is ridiculous to think that they are different. So we are supposed to think the same about stocks.

But let's look at how wrong this whole concept is. Last month we saw a bid by Hillshire Brands (HSH) for Pinnacle Foods (PF). I like this example because it shows you that even foodstuffs aren't homogenized. Pinnacle was priced inaccurately by the stock market. However, it was nowhere near as incorrectly valued as Hillshire Brands was. Not one but two savvy companies that are dominant players in their industry of commodity protein purveyors know they can pay far more than where this stock was just a few weeks ago. Some stalks of corn are not worth 60% more than they were a few weeks ago.

This morning we learned that Starboard, an activist firm, has put pencil to paper and found that MeadWestvaco (MWV), a packaging company, is spending way too much on administration -- meaning fat -- versus other companies in its industry and that there are many other assets that are being hidden by the overall structure that could be brought out. I think their analysis is sound. We have looked at this company before and pronounced it worth more than the sum of its parts. But now someone with firepower has bought enough stock to issue a serious challenge to management and begin the process of unlocking value. The stock's a buy.

I know it's not as sexy as insider trading scandal, but lost in all of the hoopla about the alleged three-way insider dealings among financier Carl Icahn, golfer Phil Mickelson and gambler Billy Walters, was just how valuable stocks can be if you don't trade them but invest in them. I personally think it is outrageous that we know about this investigation without knowing why the feds made it very clear that something was going on. How about some evidence?

But here's some evidence about how stocks aren't commodities. Back in 2011, Carl Icahn took a stake in Clorox (CLX) when it was in the $60s. He thought it could be worth substantially more if management were to simply get the led out. CEO Donald Knauss said to give him a chance to bring out the value himself. Icahn did exactly that, and Knauss kept his word. He has succeeded in giving shareholders a very nice 40% return if you include dividends. Nothing shabby there.

But it's nowhere near as good as the other rumored stock that these alleged insiders allegedly traded in, Dean Foods (DF). Now if this trading extended back to the Clorox period, you got a fantastic return as Dean Food spun off WhiteWave (WWAV), one of the great stocks of the era. Anyone who "traded" Dean Foods, perhaps because they learned about something they shouldn't have, the spinoff of the natural and organic company that is WhiteWave probably made very little if anything, although I have to believe that if the feds are really examining the trading in Dean then there had to be a gain somewhere.

The real gain occurred because we have debunked one more "commodity," the plant-based business. Nothing is more commodity-oriented than soy, but soy milk? WhiteWave's done a remarkable job making soy milk. The company's done the same with almond milk and now with lettuce. Commodities into proprietary goods because of terrific management. Soy is soy; it should trade like soy. But companies that succeed in processing it into liquids? They are anything but commodities.

Speaking of Icahn, have you noticed how his ideas have played out at Apple (AAPL)? Today we have the Worldwide Developers Conference for Apple and while that could be a long-term needle mover, what really got Apple going were Icahn's suggestions, adopted by CEO Tim Cook, to take excess cash and return it to shareholders in dividends and buybacks. Where does that fit in to the commodity view? Where does the innovation we saw today fit in?

I don't like to comment on rumors but I do want to comment on stock moves. We are hearing news that Protective Life (PL), a commodity financial-services company, might be talking to Dai-ichi Life, a large Japanese life insurer, causing the stock to spike more than 10%. The fact that the company's not saying that this is happening or not couldn't dissuade buyers who piled into the company's stock.

How about Broadcom (BRCM)? Here's a semiconductor company with a moribund stock, in part because it has spent fortunes on one division that simply hasn't panned out. By saying it will sell the division, something that will save $600 million, the company's stock jumped about 10%.

Finally, there is the remarkable action in Allergan (AGN). Ninety points ago -- ninety points! -- CEO David Pyott came on Mad Money and told people about the company's patents on one somewhat important drug. He made it clear that the company was dramatically undervalued at that moment, even as analysts had been saying that the company had a challenged growth path. Talk about a radical misvaluation: Valeant Pharma (VRX) is continually raising its bid for Allergan and it has hinted that it might not even be done raising its bid, even as the stock is now up more than 100%.

I know that the homogenists will say that these are all one-offs and that I don't understand that this is an asset class to be traded on, not an amalgam of stocks of companies that should be invested in. I know they will say that the vast majority of stocks at this moment are trading like bushels of wheat. They pretty much laugh at someone like me as a throwback to before 1984, when the futures creators first came up with the idea to lump all stocks in with each other. How ironic that it started on Kansas City Board of Trade, where Hard Red Winter had been the chief crop before the crop of Value Line stocks were bundled together.

I make no secret of my scorn for those who insisted that I am quaint or old-fashioned to point out the differences among companies and, therefore, their stocks. I do not hide my feelings about the people who think that Democrats, Republicans, the Fed, or some sort of other invisible force determines the overall value of the asset class. If these revaluations occur within a few days' time and are emblematic of what we have seen over and over again, then we have to conclude that they are anything but one-off.

They make a mockery of the fatuous commodity analysis every single day. Yet the weight of the evidence is meaningless to the professionals who trade. I say this is the one game where the amateurs can win not by trading, but by owning.

Columnist Conversations

We will take off some more risk, bank some winners SOLD PG OCT 90 CALL AT 3.3 (in at 2.90) ...
After a very calm and sedate period of volatility which saw the VIX fall not only to all time lows but had a r...
today is a good day to lighten the load and take some positions off the table. SOLD WB OCT 85 CALL AT 11 (i...
I reached out last week to my close friend Ken Shreve, who is a prominent writer for the IBD.  I asked Ke...



News Breaks

Powered by


Except as otherwise indicated, quotes are delayed. Quotes delayed at least 20 minutes for all exchanges. Market Data provided by Interactive Data. Company fundamental data provided by Morningstar. Earnings and ratings provided by Zacks. Mutual fund data provided by Valueline. ETF data provided by Lipper. Powered and implemented by Interactive Data Managed Solutions.

TheStreet Ratings updates stock ratings daily. However, if no rating change occurs, the data on this page does not update. The data does update after 90 days if no rating change occurs within that time period.

IDC calculates the Market Cap for the basic symbol to include common shares only. Year-to-date mutual fund returns are calculated on a monthly basis by Value Line and posted mid-month.