Nestle Shocks Market With CEO Changes
Contributed Opinion

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Nestlé SA (NESN:VX; NSRGY:OTC) abruptly changed its CEO, as Mark Schneider left after eight years at the helm and was replaced with a company veteran, Laurent Freixe. No clear reason was given for Mr. Schneider being "thanked and excused," though Chairman Paul Bulcke and Freixe, on a conference call, talked about execution and connection with employees.

When Nestlé hired Schneider, it broke with century-old practice by selecting a CEO from outside the company. He led a shift in strategy, to discard low-growth categories, reducing reliance on confectionary in the U.S. and bottled water, and focus on highgrowth and high-margin categories like pet care and nutritional health. For the most part, his approach proved successful, and the stock reflected that success, gaining over 100% in the first five years after he took the helm in 2017.

But his failures were spectacular, most notably the acquisition of a peanut allergy drug, eventually sold with a $2.1 billion write-down. More recently, there have been questions about the strategic direction, and this year, an unusual cut in sales guidance was made. The stock price faltered, falling over 30% from its high.

The new CEO has been with the company since 1986, holding various positions, most recently as CEO of the Latin America area. He might be well placed to gain internal support, to motivate employees, and execute well, but we may not see any dramatic strategic moves or M&A in the near term.

Initially, the stock fell on the news, partly because the abrupt and unexpected change raised questions and specifically concerns that the company's revised sales and revenue targets would not be met. Moreover, despite recent stumbles, there was no broad sense that Schneider had failed.

Given the uncertainty about what the change might mean going forward, and also that the stock is up from its early August lows, we are holding for now.

Ares Continues To Perform, With Strong Dividend

Ares Capital Corp. (ARCC:NASDAQ)  had another strong quarter, with core earnings up and net Asset Value moving to a record $19.61, while the non-accrual rate, already below the industry average, declined again. Originations year-on-year tripled to $3.9 billion in the quarter. It issued $850 million in five-year notes to be in a position to take advantage of what it calls a very active deal flow.

The stock is trading a little over book, while the yield of over 9% is well covered by net investment income, and further backed by undistributed income ("spill-over" income) equal to over twice the regular dividend. The stock price, which can be volatile, has recovered from a sharp drop at the beginning of the month when the S&P index fell.

Because of the prospect for further weakness in the stock market as well as a slowing economy, we are not buying here, but Ares remains a strong hold, particularly for investors seeking income.

Gladstone Has Mixed Quarter, but Covered Dividend Continues

Gladstone Investment Corp. (GAIN: NASDAQ) reported a slight decline in gross investment income for the quarter just ended, though lower expenses after high gainsbased incentive fees the previous quarter, meant that net investment income increased.

During the quarter, Gladstone put two new companies on non-accrual status, bringing the total to four, representing nearly 8% of the fair value on debt investments. The company emphasized, however, that these two companies are now profitable and should return to accrual status over the next year. This move is, however, a reflection of softness in the small business sector. Gladstone also said it saw an increase in opportunities for new investments, though the competitive environment was pushing up valuations.

Gladstone has low leverage, and the dividend is covered by net investment income. Leverage is low. Trading just below book, the stock has a current yield of 7.5% based on its regular monthly dividends. Gladstone, as discussed previously, pays a monthly dividend based off its debt income, and irregular supplemental dividends from net capital gains. Last year, these supplemental dividends were particularly strong at $1.48 per share, though this year so far, it has not paid any.

Gladstone can be bought here for the yield, but we are not expecting dramatic capital appreciation, given the aggressive use of its ATM for equity sales when the stock moves to a premium over book value.

Kingsmen Continues Recovery With Strong Growth and Robust Outlook

Kingsmen Creatives Ltd. (KMEN:SI) reported a strong first half, with net profit up over 100% on a 20% increase in revenue.

All divisions saw strong growth.

The company also said it expected a "robust" second half on the back of a strong pipeline of secured contracts.

As we have discussed (Bulletin #913), the company appears back on track after the COVID lockdowns saw contracts dry up.

Selling at only half of book value, with a strong balance sheet and nearly 4% yield, Kingsmen is a buy.

TOP BUYS this week, in addition to the above, include Midland Exploration Inc. (MD:TSX.V), Lara Exploration Ltd. (LRA:TSX.V), and Fox River Resources Corp. (FOX:CNSX).