You probably know from experience that there is not as much information on small-cap companies as there is on large companies. Of course, this makes it really hard and difficult for individual investors to make a proper and accurate analysis of certain small-cap companies. However, well-known and successful hedge fund investors like Carl Icahn and George Soros hold the necessary resources and abilities to conduct an extensive stock analysis on small-cap stocks, which enable them to make millions of dollars by identifying potential winners within the small-cap galaxy of stocks. This represents the main reason why Insider Monkey takes notice of the hedge fund activity in these overlooked stocks. Sanderson Farms, Inc. (NASDAQ:SAFM) shares haven't seen a lot of action during the third quarter. Overall, hedge fund sentiment was unchanged. The stock was in 15 hedge funds' portfolios at the end of the third quarter of 2018. At the end of this article, we will also compare SAFM to other stocks including Yamana Gold Inc. (USA) (NYSE:AUY), Anixter International Inc. (NYSE:AXE), and Chromcraft Revington, Inc. (NYSEAMEX:CRC) to get a better sense of its popularity. In the financial world, there are many tools stock market investors put to use to evaluate stocks. A duo of the less utilized tools is hedge fund and insider trading sentiment. We have shown that, historically, those who follow the best picks of the elite investment managers can outpace the S&P 500 by a very impressive margin (see the details here).
While collecting data on the company, we found Wolf Hill Capital, LLC 's Quarterly Letter to its shareholders. In the fourth quarter, the fund purchased a short position in Sanderson Farms, and offered its opinion on the company in its report: "During the quarter we established a sizeable short position in Sanderson Farms, the third largest domestic poultry processor with approximately an 8% U.S. market share. We believe that SAFM and other domestic chicken processors are currently over-earning based on unsustainably high processing margins that are poised to mean-revert over the course of the next two years as industry capacity ramps up. We believe that fair value for SAFM is about $72/share, based on 12x mid-cycle earnings of $6.00/share, or 56% lower than the price at which we initiated our position.Chicken production is a highly volatile, low-margin, commodity business with virtually no barriers to entry. The profitability of a chicken producer is primarily a function of two variables: the price of fresh, frozen, and processed chicken products, and the spread between feed costs (corn and soy) which account for 45% of total costs. Over the course of the past few years, SAFM has benefited from a perfect storm type scenario of elevated chicken prices due to a temporary curtailment in supply, and low feed costs. Over the past 6 years, SAFM has averaged $8.17/share in EPS, versus $12.30 in 2017. 2017’s record earnings were driven by gross margins/pound of $.16 versus a 15- year average gross margin/pound of $.09. As is often the case in highly cyclical industries, when industry conditions tighten considerably, producers add capacity to take advantage of this favorable, often fleeting dynamic. New capacity takes time to ramp up and often comes on-line just as industry conditions are beginning to roll over. Protein Industry analysts are currently forecasting supply growth of over 4% per year over the course of the next several years based on already announced capacity additions as many previously announced expansion projects come on-line. We anticipate this supply growth to continue to put downward pressure on chicken prices. Even if feed costs do not continue their recent upward trajectory, SAFM’s 2018 earnings will likely fall substantially below current consensus earnings estimates." Let's take a peek at the new hedge fund action regarding Sanderson Farms, Inc. (NASDAQ:SAFM).