Food and Beverages(F&B) stocks have been the rage in recent weeks and have outperformed most sectors in the current bear market. This was quite perplexing as one would have thought that rising raw material costs would be a big dampener on earnings and future profit growth. Combing through ideas for a laggard F&B stock. I came across Rex Bhd. 

A cross section of F&B companies

                                        YTD              PER            NTA(pershare)     Current Share Price

1) BJFood                      UP 106%          18X            RM1.25                    RM4.57

2) Texchem                   UP 229%           15X            RM2.39                    RM3,96

3) OFI                            UP 8%               13X           RM0.92                    RM1.00

4) Power Root Bhd       UP 14%              26X           RM0.64                    RM1.67

5) Cocoaland                UP24%               26X           RM0.57                    RM1.27

6) Rex Bhd                    DOWN12%        47X          RM0.26                    RM0.215

PER vs NTA comparison

Rex is clearly the most expensive F&B stock on this list based on PER alone. However it also happens to be the smallest cap stock among the list with a market cap of only RM104M. Given its small cap status one can argue that it can demand a higher PER. However it is also the only F&B stock to trade below its NTA which is rare since most consumer stocks do have a price to book of over 1.0. It has also severely underperformed its peers and is clearly a laggard which looks promising. The only IB report I managed to find was one by CIMB Resesarch which was written in November last year.

Margin compression

Margin compression has been the biggest proplem faced by F&B companies since raw material prices from wheat to palm oil have gone through the roof. Despite these hurdles, most F&B companies have still reported good profit numbers and there is indication that the cost may soon be passed on to consumers in the raising of product prices. 

With the Federal Reserve raising interest rates aggressively in its fight against inflation would be positive for F&B companies. if the cost can be passed down and if peak commodity prices are around the corner, would be a big positive for future earnings.

Price reaction to financial results reports have been positive 

This was seen across the board in the F&B sector signalling that investors view there is more profit growth in the coming quarters. In contrast plantation stocks were sold off recently despite bumper profits which could mean investors hold a view that peak earnings are upon us

Chase the winners or go with the laggard?

Perhaps the most difficult question to answer. Really depends on what you think the fair value is for the company you wanna buy and the risk to reward from current prices. I do own shares in BjFood which I purchased at RM3.00 but would not buy it at the current price. I do not own Rex now but may look to buy it in the near future. 

Disclaimer: I am not a 'guru" nor do I aspire to be one. There are more than enough of those people around. Just sharing a little information which is hopefully useful to all.