Choice Equities Capital Management, an investment management firm, published its first-quarter 2021 investor letter – a copy of which can be downloaded here. A net return of +29.2% was recorded by the fund for the Q1 of 2021, outperforming its Russell 2000 benchmark that delivered a +12.7% return, and the S&P 500 Index that had a +6.2% gain for the same period. You can view the fund’s top 5 holdings to have a peek at their top bets for 2021.
Choice Equities Capital Management, in its Q1 2021 investor letter, mentioned Farmer Bros. Co. (NASDAQ: FARM), and shared their insights on the company. Farmer Bros. Co. is a Northlake, Texas-based foodservice company that currently has a $214.7 million market capitalization. Since the beginning of the year, FARM delivered a 158.67% return, while its 12-month gains are up by 45.02%. As of May 26, 2021, the stock closed at $12.08 per share.
Here is what Choice Equities Capital Management has to say about Farmer Bros. Co. in its Q1 2021 investor letter:
“FARM – One of those other new holdings is Farmer Brothers, Inc., though this one seems to offer higher upside if our expectations of improvement in profitability prove to be on the mark. As one of just six coffee roasters and distributors in the United States, the longtime family run company has produced reliable profits for most of its 100-year existence. But the last few years have certainly been trying. Beginning in 2018, prior management bungled a sorely needed transition from its severely antiquated roasting facilities, resulting in stockouts, cost overruns and a general inability to get coffee beans to its end
customers in a dependable and cost-efficient manner. After the missteps, and perhaps some infighting on the future direction of the company from third-generation family members who once held meaningful ownership positions, it appears the board eschewed the family’s input and opted to go the route of becoming a professionally run company run for public shareholders.
Shortly thereafter, Farmer Brothers installed CEO Deverl Maserang in September 2019, an executive with impressive consumer goods turnaround experience. He also looks to be quite well versed in coffee logistics from his prior time as a VP, Global Supply Chain for Starbucks. Unfortunately for the company, just as it looked like they might be making some progress on turnaround initiatives, the pandemic hit. Customers everywhere shut their doors, and volumes declined by 70% this past spring.
Though the pandemic’s impact on operations was of course unwelcome, recent signs suggest the company did not let the crisis go to waste. Management was able to hasten their cost cutting efforts. And the company was also able to make continued progress on its multi-year initiative to replace its old, unionized facilities with highly automated equipment, a transition which was completed this past January. Now, the company is ready to leverage the state-of-the-art facilities that have both lower operating expenses and capital expenses.
In addition to the upgraded operating facilities, management’s view, which seems to be confirmed through conversations with former employees and competitors, suggests there are a lot of other areas of low hanging fruit on which the company can improve operationally as well. Indeed, the company has several key initiatives in place which together should reinvigorate the more profitable Direct Store Distribution (DSD) segment. Recently, they have rolled out HighJump handheld devices to their delivery representatives, a software-based platform focused specifically on DSD models to maximize sales while reducing distribution costs through improved inventory tracking and fulfillment functions. The HighJump technology also enables pre-sale opportunities for their customers, an initiative which alone could drive double digit growth on each delivery route. Additionally, the company is rolling out new SKUs for promising upstart brands such as High Brew that can benefit from the delivery capabilities a larger operation like Farmer Brothers can offer.
A return to cash flows from the level of just two years ago would likely produce an attractive investment result given the recently depressed prices (which look to have gotten some additional downward pressure from non-fundamental, index-mimicking sellers as the company will fall out of the Russell 2000 this summer). But a number of factors here also suggest better results could be in the offing. In Mr. Maserang, we now have a well-regarded CEO in place who is aligned with shareholders. His focus on profits and efficiency rather than just volumes is a welcome change from years past. He will also have the added benefit of using upgraded operations to deliver coffee to customers who are finally re-opening their doors. Altogether, it does not take a wild-eyed optimist to conclude a meaningful improvement in profitability in coming years may be on the horizon.”
Our calculations show that Farmer Bros. Co. (NASDAQ: FARM) does not belong in our list of the 30 Most Popular Stocks Among Hedge Funds. As of the end of the first quarter of 2021, Farmer Bros. Co. was in 10 hedge fund portfolios, compared to 13 funds in the fourth quarter of 2020. FARM delivered a 52.53% return in the past 3 months.
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