By Tyler Laundon, Chief Analyst, Cabot Small-Cap Confidential
From Cabot Wealth Advisory 11/9/15 Sign up for Cabot Wealth Advisory—it’s free!
Companies that make flavorings are as varied as the industry itself. Senomyx (SNMX), a small cap company that was founded in 1998 by a pair of professors from U.C. San Diego and Stanford University, set out to clone human taste receptors to create alternatives to high fructose corn syrup. In addition to working on sweet and savory taste modifiers, it has also worked on products that reduce bitter tastes, as well as those that could work as salt alternatives. The stock has had some ups and downs, but generally speaking, it hasn’t delivered steady returns for investors. I’d steer clear.
On the other hand, the mid-cap company International Flavors & Fragrances (IFF) has a long-term chart that most investors would like mirrored by more of their own holdings. The last year has been a little touch and go, and the stock is only up around 10%, but over the past three years it’s up over 80%.
The company manufactures flavors and fragrances of all sorts, and I’m sure they wind up in a lot of products I use, but my feelings toward it are somewhat similar to those that bubble up during pumpkin season—like something’s just not quite right. Over the last 20 years, IFF (maybe it’s the ticker symbol that I don’t trust) has been named as a PRP (Potentially Responsible Party) as a generator of waste materials for alleged pollution at eight facilities. It also has encountered issues with Chinese authorities related to the emission of odors from several of its plants in China. I think that’s quite an accomplishment, though perhaps not one to be proud of.
There is one stock in the flavorings industry that I do like, and that’s McCormick (MKC). It’s another mid-cap, and it’s more about making spices and sauces then taste bud-tricking chemicals. It doesn’t have pending legal proceedings listed in its most recent 10Q. And most importantly, I always buy their spices. Their Montreal Steak Seasoning is absolutely critical when making a Spanakopita Turkey Burger (I learned that from my mother-in-law, not Rachael Ray).
I suspect that McCormick’s manufacturing plants also put off some interesting smells. But I imagine them to be more pleasing than offensive. I admit I don’t know, but I’m thinking more like the smell of roasting coffee in my home town of Waterbury, Vermont, where I grew up with Keurig Green Mountain (GMCR), than the offensive smells of chemically engineered flavorings and fragrances in IFF’s China plants. I think that McCormick is a higher quality company than many in the flavorings industry, and its track record delivering gains to investors is stellar. It’s up 250% over the last decade and 115% over the last five years. It also pays a 1.9% dividend. I also like that it just bought the parent company of Stubb’s barbeque sauces, One World Foods, in August this year to build out its sauce portfolio. Stubb’s is pretty good stuff.
Bottom line: I think it’s best to go easy on the pumpkin flavorings—the shelf life is about as long as a jack-o-lantern’s. And once the fun is done, all the leftovers are going in the landfill. It’s better for the body and soul to go with the real thing, whether you’re putting it in your body or in your portfolio.