General Mills: Profit from Home Cooking

In my newsletter EPIC Insights and weekly market commentary, I have stressed that I am bearish on the economy, employment and consumer spending. As unemployment increases and credit tightens, Americans will be forced to spend less and save more. Since we are an economy built to satisfy consumers' needs, the transition from spending to saving will have dramatic consequences. Among the losers in this transition will be restaurants as people eat more meals at home. The resulting winner will be food manufacturers.

To position for this transition, this week's fundamental trade is General Mills (GIS). GIS manufactures and markets consumer foods worldwide. Their portfolio of brands includes Cheerios, Bisquick, and Haagen Dazs. Walk down any aisle in the grocery store and you will see GIS's products on the shelves.

From a top-down viewpoint the appeal of this company is clear. If the economy weakens substantially, GIS should perform better than others as their business is recession proof. Even if the economy were to improve, GIS will benefit as people continue eating more meals at home.

When we take a bottom-up look at the business, the shares are enticing. Management has done an excellent job running the business. The cash conversion cycle has shortened and turnover ratios have improved. Currently trading at a P/E of 14.5 (vs. 17.9 for their peer group) with a dividend yield of 3% (vs. 1.9% for their peer group) the shares are attractively valued. Using a variety of valuation models, I have determined a fair-value estimate for GIS between $75 and $85 and will use the lower amount for fair value. With the shares currently trading 23% below fair value they can be purchased with an adequate margin of safety. I recommend a position in GIS as this week's fundamental trade.

Subscribers to my newsletter were alerted to this trade Sunday evening and have a profit of 3.1% in one day. While that is a nice return, when you consider that the S&P 500 (SPY) dropped 3.6% in the same day, we are already 6.7% ahead of the index. In any environment, investors search for alpha. In a market as bad as this, any source of incremental return must be capitalized upon.