Daily Yonder 40: August 3

The Daily Yonder 40 dropped for a third week, which left the index of publicly traded stocks representing the economy of rural America down 7.5 percent since July 1. All the major indexes have declined since that time — but the DY40 has fared a bit worse than the others:

The Dow is down 1.7 percent since July 1.
The NASDAQ is off 3.5 percent.
The S&P 500 has dropped 4.7 percent.

The full listing of the DY40 is below. You can see that some stocks did well, even in a down market. Cabella’s reported higher earnings this past week and when some analysts upgraded the stock, the outdoor equipment store jumped by 12 percent in the week.

Mine Safety Appliances (which makes equipment for the underground mining industry) jumped over ten percent in the week after being upgraded. Sturm Luger also continued gaining ground even in a bad market.

Other DY40 companies struggled. The newspaper owner Lee Enterprises continued to decline with slow ad sales and was off ten percent for the week. The manufactured homebuilder Walter Industries was down more than 15 percent for the week.

There has been a continuing and quite interesting discussion about what the DY40 means. Please join in here. I would remind everyone here that the DY40 is not meant to be a good investment. It is meant simply to reflect the big business side of the rural economy.

In the meantime, one of the original DY40 consultants, John Borden has done his own analysis of the stock index. (Borden is the former investment relations manager for JP Morgan/Chase.) Okay, here’s John’s take:


By John Borden

First I did a rough calculation of the performance of the DY40 in the six months prior to July 23, before the big correction in which DY40 took a big hit. By return I mean price appreciation, as I did not take into account dividends. I divided the DY40 into the following performance categories for that time period:
“¢ 30% or more return: 9 companies
“¢ 20 to 30%: 5 companies
“¢ 10 to 20%: 4 companies
“¢ 0 to 10%: 10 companies
“¢ 0 to negative 10%: 7 companies
“¢ negative 10% or more: 5 companies.

All of this led to, roughly, an approximate 9% to 11% gain for the Y40 during the six months prior to the market correction. I should note that the nine stocks in the category of 30% or more return were for the most part just above 30% and none higher than 40%.

My starting hypothesis had been that the Y40 fell more in late July because it had been up more than the market as a whole in previous months. That theory proved false. The DY40 had not been out-performing the market. Part of my reason for the starting hypothesis was that there have been a group of mid-cap stocks that have been up significantly over this period, anywhere from 50% to 150%, as they have been adopted by hedge funds that have seen the viability of their businesses in the industrial equipment area and the engineering sector as well as their low debt levels and lack of investment community coverage. This group of stocks, some of which I am familiar with, dropped radically last week as the take out premiums were to some extent removed. I obviously did not find any stocks with returns like these in the DY40.

The second thing I did was extremely subjective. I looked at the lists showing the top 15 shareholders of the DY40 companies and rated each as follows:
“¢ Those with too many index investment or little quality ownership — a “warning sign” — 7 companies.
“¢ Those with a traditional investor base, a decent balance between index and discretionary as well as seemingly appropriate names for the industry — 22 companies
“¢ Those with some interesting investors that I would not have expected and low index levels. This mix attracts my interest ““ 11 companies.

This did not tell me much of anything especially consequential either. It did tell me that the DY40 is for the most part well recognized and covered by the usual suspects in the asset management industry, with the possible exception of powerful hedge funds.

Overall, this was not a completely useless exercise as it eliminated the following two possible reasons for the late July performance: out performance in the prior period and/or visibly weak hands.

So, Dr. Watson, what’s left?
1. A perceived higher exposure to a lower credit segment in rural America (lower end consumer credit obviously being in the spotlight to some extent).
2. A relatively lower level of international business exposure and hugely lower level of foreign currency earnings to be translated back into dollars. (Here, because the DY40 is equal weighted — that is, an equal amount was invested in each of the stocks regardless of company size — the impact of Wal-Mart, Deere or a few other large firms has been diluted.)
3. And much less important than the first two, there may be a lack of eyeballs on companies in the DY 40 in the hedge fund sphere where declines are at times met by cash in waiting

Each of these reasons, it seems to me, underscores the good choice of stocks made to create the DY40 because, simply, one would generally expect these characteristics in companies from rural America. A cross section of American stocks representing both urban and rural Amereica would be presumed, rightly or wrongly, to have a higher average consumer credit score. It would have more of a multinational component. And some sectors of this broader market have perhaps been more in the crosshairs of those hedge fund folks whose thematic interests of late do not appear to be focused on the DY 40.

CompaniesTickerPrice August 3Price Change for WeekPercent Change for Week
Alico Inc.ALCO47.11-$0.09-0.19%
Andersons Inc.ANDE45.18$2.786.56%
Burlington Northern Santa Fe Corp.BNI79.1-$3.64-4.40%
Berkshire HathawayBRKB3,599.00-$16.00-0.44%
Bassett FurnitureBSET12.57-$0.81-6.05%
Peabody Energy Corp.BTU39.43-$1.65-4.02%
Cabela’s Inc.CAB23$2.6312.91%
ConAgra Foods Inc.CAG25.76$0.020.08%
Cato Corp. Cl ACTR20.54-$0.65-3.07%
Citizens CommunicationsCZN13.28-$1.08-7.52%
Deere & Co.DE117.46-$1.48-1.24%
Dean Foods Co.DF28.56-$0.95-3.22%
DIRECTV GroupDTV21.16-$1.07-4.81%
Family Dollar Stores Inc.FDO28.26-$1.98-6.55%
Fleetwood Enterprises Inc.FLE8.94-$0.44-4.69%
FairPoint CommunicationsFRP14.94-$0.88-5.56%
Gaylord Entertainment Co.GET48.96-$0.60-1.21%
Hormel FoodsHRL33.8-$1.20-3.43%
International Speedway Corp.ISCA48.29$0.130.27%
Lee EnterprisesLEE16.34-$1.88-10.32%
Mohawk Industries Inc.MHK87.5-$5.07-5.48%
Monsanto Co.MON64.08$0.630.99%
Mine Safety Appliances Co.MSA46.38$5.2412.74%
Southwest BancorpOKSB18.63-$1.59-7.86%
Plum Creek Timber REITPCL38.65$0.100.26%
Penn Virginia Corp.PVA39.19$1.193.13%
Ralcorp HoldingsRAH52.51$0.971.88%
Regions Financial Corp.RF29.09-$1.19-3.93%
Sturm Ruger & Co.RGR20.37$1.035.33%
Smithfield FoodsSFD31.51$0.170.54%
Skywest Inc.SKYW21.94-$0.14-0.63%
Southern Co.SO33.62-$0.17-0.50%
Stage Stores Inc.SSI16.42-$1.63-9.03%
Tractor Supply Co.TSCO46.39$0.160.35%
Tyson FoodsTSN20.4-$1.01-4.72%
UST Inc.UST52.51-$1.50-2.78%
Waddell & Reed Financial Inc.WDR23.93-$1.32-5.23%
Walter IndustriesWLT21.62-$3.98-15.55%
Wal-Mart StoresWMT45.52-$0.42-0.91%
Cimarex EnergyXEC36.22-$1.83-4.81%

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