Why shares of Select Harvests Limited crashed 11% today

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Shares of Select Harvests Limited (ASX: SHV) have crashed 11% today, falling to just $6.15 after closing at $6.91 on Thursday.

It was announced this morning that Select Harvests, which is an almond producer, would have its name removed from the S&P/ASX 200 (Index: ^AXJO) (ASX: XJO), which tracks 200 of Australia’s largest publicly traded companies. That comes as part of the S&P Dow Jones Indices quarterly rebalance following a sub-par performance from Select Harvests in recent months.

Just like BHP Billiton Limited (ASX: BHP) is reliant on a high iron ore prices, or Orocobre Limited (ASX: ORE) is reliant on a rising lithium price, Select Harvests relies on a steady – or rising – almond price to grow its sales and earnings.

For the 12 months ended 30 June 2016, Select Harvests reported a 28% lift in revenues compared to the prior corresponding period but net profit fell 53% to just $27.9 million (or $33.8 million when you include the impact of after-tax gains on sales). Its final dividend was also cut from 35 cents in 2015 to 25 cents in 2016, although it was fully franked this time around.

Management said the sharp drop in earnings was a result of a correction to the global price of almonds from the record highs achieved last year.

It could get worse…

Some 80% of the world’s almonds come from California which has endured a severe drought in recent years. That drought led to a reduction in almond supply, thus pushing prices higher which favoured companies such as Select Harvests.

However, the drought is now easing in parts of California with recent reports suggesting that this year’s almond harvest could produce a record haul for the state. Here’s what CNBC said on the matter (my emphasis):

The harvest underway in California’s San Joaquin Valley is expected to result in an estimated 2.05 billion pounds of almonds this season, according to the U.S. Department of Agriculture. That’s up about 8 percent from last year and would shatter 2011’s record crop, which weighed in at 2.03 billion pounds.

“That level of supply should lead to lower almond prices that “flow through” to the U.S. consumer, spurring additional demand, Goldman Sachs analyst Jim Godsil told investors. It could also contribute to signs of stabilization in the industry.”

That would not be good news for Select Harvests as it would likely lead to a pullback in almond prices. Hence, it wouldn’t be great news for the company’s shareholders, either.

Shares of Select Harvests certainly have the potential to climb from their current level, but it would be very difficult to do if almond prices continue to fall.

A safer bet for most investors would be to consider investing in more familiar businesses that have greater potential to grow their share price and pay out a healthy dividend yield. These three blue-chip stocks could be a great place to start looking. Simply click here to gain access to this comprehensive FREE investment report.

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Motley Fool contributor Ryan Newman has no position in any stocks mentioned. The Motley Fool Australia has no position in any of the stocks mentioned. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Bruce Jackson.

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