Food Stocks: Value and Growth
Every person on the face of this Earth has at least one thing in common, they need to eat food! Americans spend roughly 10% of their disposable income on food, with 5.2% of that total going towards eating at home. That figure has remained relatively static for the past two decades, and the consistent demand for food products has helped make food stocks an excellent choice for defensive portfolio allocations.
Food stocks are listed under the consumer staples sector. Consumer staples usually do well during recessions and times of extended uncertainty. Food stocks and the consumer staples sector as a whole are widely considered to be recession resistant. Basically, recession resistance means that a business or industry will not be significantly affected by a slowdown in the economy.
Some food stocks are highly coveted for their recessionary resistance. Many of these companies have long histories of stable operations and revenues. The stability of these businesses appeals to investors during times of uncertainty.
Interested in more defensive stocks? Check out our article on gold stocks.
Food Stocks and The Business Cycle
Regardless of the economic environment, consumers spend money on food. While some studies show that recessions affect food spending, the impact is usually significantly less so than other types of consumer spending. Don’t let ‘recession resistance’ lull you into a false sense of security. Food stocks are resistant to recession, they are not recession-proof.
That being said, the best-performing sector during a recession is consumer staples by a wide margin. Food stocks are widely viewed as a defensive asset, so capital tends to flow towards the sector when the economy starts contracting.
The U.S. economy appears to be strong so a recession doesn’t appear to be imminent. However, there are a few red flags that are concerning some investors, like falling bond yields and slowing GDP growth.
No one knows when the next recession will begin, but it’s widely agreed that we’re currently in the later phase of the current economic expansion; the final phase before recession. but there are no hard rules for how long the economy can stay in this phase, and there’s also the possibility it could swing back towards expansion. We could be years from the next recession but being prepared in advance is a prudent move.
Now that you know the landscape, let’s get into the players. These companies represent some of the most notable food stocks on the market. This is a great place to start if you’re seeking a place to position the defensive portion of your portfolio.
Best Food Stocks to Buy- Packaged Food Stocks
The packaged food space is rich with legacy brands with deep customer loyalties. These companies have huge portfolios of brands that provide relatively stable revenues.
General Mills, INC (NYSE: GIS)
It’s a household name for many Americans, but General Mills is everywhere. The firm sells more than 100 brands in over 100 countries and its dividend payments have an unparalleled track record. General Mills has been paying shareholders dividends for over 118 years!
General Mills flagship brands include favorites like Betty Crocker, Green Giant, Haagen-Dazs, Cheerios, Yoplait, Pillsbury, and Progresso.
It’s not easy for a food company this large to find avenues for growth, but management is getting creative. Last year, General Mills acquired all-natural pet food produce Blue Buffalo for $8 billion in an all-cash deal. This new direction could have significant long-term implications. General Mills expansion into pet products could help it fuel long-term revenue growth by capturing market share in a new category.
Kellogg Company (NYSE: K)
Kellogg’s is a classic American brand that dates back to 1905, and it’s no exaggeration to say they invented the modern breakfast cereal. Dr. John Harvey Kellogg founded the company just a few years after developing a process for producing the first corn flake cereals.
Today, Kellogg’s is a $21 billion empire with operations in approximately 180 countries. Brands like Kashi, Keebler, Famous Amos, Morning Star Farms, Pop-Tarts, and Eggo comprise just a small portion of this company’s massive portfolio.
Kellogg’s currently pays a $2.28 cent annual dividend. At current prices, it’s yielding about 3.65%. The company has a history of committing a large portion of its retained earnings to dividends. Kellogg’s payout ratio is over 90.84% and the company has increased dividend payments at a 5.56% rate in the past year.
Best Food Stocks to Buy- Alternative Meat Stocks
Meat alternatives catapulted to super-stardom this year after Beyond Meat completed its IPO in May. The stock’s meteoric rise is a sign that the market is ready to sink its teeth into plant-based meat stocks.
Beyond Meat (NASDAQ: BYND)
This is the one that started it all. When the company hit the market in early May, most people on Main Street had even heard of this upstart brand. After a rally that took share prices to over eight times their IPO value, Beyond Meat is a household name. Wall Street is in love with this company, it’s a dominant player in a space that is expected to explode over the next few years.
Beyond’s downright absurd valuation shows just how much investors are willing to pay for a piece of the pie. The company has a $9.79 billion market cap on annual sales of only $87.9 million (with an ‘M’) in 2018. Granted, Beyond already surpassed that total for 2019, but shares are still trading for 36 times the most recent quarterly sales figures and over 246 times the company’s book value.
The hype is driving share prices to levels that, logic states, are not sustainable. It seems unlikely that Beyond can support these valuations long enough for the company to grow into them. Competition is heating up in the space and the company is having issues keeping up with demand. However, Beyond had plenty of expansion firepower. The company just completed a second public offering to float more shares and capitalize on the opportunity presented by the runup in share prices.
As long as Beyond continues to grow revenues at high rates, the market will be satisfied and share prices can continue to rise. However, if you’re not already in this one, you’re a little late to the party. If you believe in the long-term potential of meat-alternatives, this stock is definitely worth watching. However, it would be best to wait for a substantial pullback before wading in the waters.
Tyson Foods (NYSE: TSN)
Beginning this summer, Tyson Foods will begin selling plant-based chicken nuggets under the brand name Raised and Rooted. Interestingly enough, Tyson, the largest meatpacker in the U.S., owned a large stake in Beyond Meat prior to its IPO, but it divested its shares before the offering because it wanted to develop its own plant-based product line.
Tyson CEO Noel White thinks alternative meat could turn into a billion-dollar business for the company. Euromonitor predicts that the meat alternative market will hit $22.9 billion globally by 2023, and Tyson is in a great position to capture market share.
Even with Beyond’s rocket-ship runup, Tyson is still worth roughly three times the young startup. Tyson’s divestment of its Beyond Meat shares shows that the company is confident in its ability to operate in the space.
Trading at only 14 P/E, Tyson is a great value and share prices are following a strong uptrend. If Tyson can capture ground in the plant-based meat business, it could push the stock even higher.
It’s not the hot new thing, but Tyson has much better investable fundamentals than Beyond Meat.
Food stocks are a great way to position your portfolio defensively. You can even find good prospects for growth if you look in the right places. We’re in the midst of a late-phase economic cycle, so now might be the time to allocate a portion of your portfolio to food stocks like these.
By the time a pending recession is clear, the market will undoubtedly drive up the cost of these stocks and substantially reduce returns for incoming investors. A preemptive defensive position could pay off big time if the economy takes a turn. In the meantime, these stocks will provide good diversification and value for your portfolio.
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