Three Years On, Rural Stocks Still Lead

Through bubble and bust, stocks from companies that do much of their business in rural America have done better than the Dow Industrials and the S&P 500.

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Exactly three years ago we picked 40 publicly-traded stocks that represented rural America and invested (an imaginary) $1,000 in each. We wanted to see how companies that did much of their business in rural America compared to the big boys of investing – the Dow Industrials and the Standard and Poor 500. 

The chart above tells the tale. Over the past three years, the Yonder 40 has consistently stayed above the other two major stock indices.

That’s not to say the rural stocks have been winners. The 40 rural stocks are down 7% from three years ago.

But that’s a lot better than either the Dow (down 24%) or the S&P 500 (down 28%).

The Yonder 40 can thank much of its good fortune over the last three years to coal and guns.

Walter Energy, a coal miner, has the highest gains of all the rural stocks over the past three years, and second place goes to another coal stock, Cimarex Energy.

The next two spots go to Sturm Ruger, the gun maker, and Cabela’s, the outdoor outfitter. Both companies benefited from the strong gun sales that erupted after the election of President Barack Obama, when firearm owners feared the Democrats would enact new gun control laws.

The stocks in the index that have fared the worst are GreenHaven, the commodity index; Dean Foods, the milk giant; Alico, which owns farmland in Florida; and Monsanto, the seed and farm chemical giant.

Retail stocks have done well, except for Wal-Mart, which is down slightly over the three years. 

Most rural stocks (27 out of 40) are higher now than three years ago.

Some of the original Yonder 40 stocks from 2007 have disappeared, done in by bankruptcy or merger. Burlington Northern Sante Fe Corp., the rail line, was bought by another Yonder 40 firm, Berkshire Hathaway.

Fleetwood, the mobile home maker, went into bankruptcy. Lee Enterprises, which owned small town newspapers, was removed from the DY 40 list when its stock price dropped below a dollar. (Lee has since recovered to $2.95 a share; in June of 2007, Lee was selling for over $20 a share.) UST, the snuff maker, merged with a larger company.

We’ve added new rural firms to the list. Rail America is a short haul railroad. Universal is a tobacco buyer. GreenHaven is an index of commodities — metals, coal, grains, meat.

We didn’t pick the Yonder 40 out of a hat. DY relied on James Branscome, a native of Hillsville, Virginia, and a former managing director of Standard and Poor. Brother Branscome (now living in Montrose, Colorado) helped choose the stocks for the S&P 500, so finding 40 for the Yonder was no big deal. He received able help from John Borden, a native of Danville, Virginia, and a former director of investor relations for JPMorgan Chase.

And what about the future? We here at the Yonder don’t trust anyone who claims to know, but we can see some trends at work.

First, firms are seeking to expand their businesses through lower prices. Meat companies are working to reduce costs (even as they try to cut supply to maintain prices). Dean Foods reports that some private label brands are selling milk below costs. (Consumers are trading down to private labels to find lower prices.)

Food companies are trying to reduce prices in order to increase sales, chasing customers who are eating out less during this recession and cooking more meals at home. The tactic appears to be working. Most major food companies announced that they are increasing their stock dividends.

Discount stores are doing well. Dollar General — not a DY 40 member, but closely related to Family Dollar — saw an increase in first quarter earnings of 64%. Dollar General plans to open 600 new stores this year. Family Dollar is reporting continuing increases in sales.

Wal-Mart has been aggressively cutting prices, trying to make up for a slowdown in new traffic. Wal-Mart has essentially filled out the U.S. market and has no place else to build. So the company is trying to increase traffic by cutting prices.

Rural retailers besides Wal-Mart continue to do well. Stage Stores and Cato report higher earnings and plans for new stores.

(Here is how the full Yonder 40 has fared during 2010.)[img:Yonderjune28.png]

Mergers continue among the Yonder 40 stocks. Food companies are consolidating.

“Rural telecommunications companies are scrambling to buy up each other to increase their size, spread their sizeable capital expenditures across a wider base of customers and gain purchasing power when buying equipment,” the Wall Street Journal reports. “They continue to face pressure from cable providers, which poach customers with their rival phone services, as well as from consumers giving up landlines to go entirely wireless.”

Analysts expect banks to consolidate, too. Bigger regional banks are buying smaller groups. Regions Financial, a DY 40 member, was listed recently as a likely takeover target as bigger companies look to expand.

Nuclear power may be making its long anticipated comeback. Southern Co. has begun work on two new reactors. Plans for new plants are dotted across the rural South.

Exports will continue to play a role for these rural businesses. Coal stocks have moved higher as China continues to expand. Deere sees increasing demand for its farm equipment in the U.S. and Canada.

Finally, there is some indication that the 2008 election is having some impact on rural business. There is an ongoing investigation into anti-trust violations in the food, seed and farm-chemical business. (Among other things — including Chinese competition on herbicides — the anti-trust investigation may be weighing down Monsanto’s stock, which is off by more than 40% this year.) 

And the Obama Department of Labor has forced poultry companies to begin paying workers for the time it takes to put on and take off protective clothing in meat processing plants.

When we began the Yonder 40 in 2007, we hoped that the index would give us an independent measure of the rural economy. What we have learned is that rural stocks have acted differently from the major indices. During this recession, they have, as a whole, been less affected by the downturn.

Has that benefited rural residents? That is a far tougher question to answer.

 

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