ConAgra Foods, Inc. (NYSE:CAG), the maker of Chef Boyardee, Marie Callender's and Slim Jim, reported disappointing earnings last week, and the stock has been falling for the past 6 weeks. Growing competition from private labels and a shift in consumers buying toward more natural foods has been hurting sales. Organic foods rivals like Annies Inc (NYSE:BNNY) have been posting solid numbers, while natural foods companies like The Hain Celestial Group, Inc. (NASDAQ:HAIN) have reported double-digit profit and sales growth the past 11 quarters. Is this a growing trend or should investors be buying CAG shares after a 16% pullback?
ConAgra Foods has faced intense pressure from private label substitution over the past few years. It has responded by acquiring Ralcorp, which was the largest U.S. private label food manufacturer, at the end of 2012. Management believes that there are opportunities to focus the Ralcop business on organic growth. The synergies resulting from this takeover are expected to fully materialize by the end of FY 2017. Ralcorp Food Group generated sales of $703.4 million in the most recent quarter, while Ralcorp Frozen Bakery Products sales were $238.6 million. The stock had held up well until recently, which according to the Stock Traders Daily trading report is now trading below long-term support.
Despite the recent pullback in the stock, ConAgra shares are still up over 30% in the last 2 years. Underlying the strong performance in recent years has been the solid growth of operations. Between 2010 and 2013, ConAgra increased its annual revenues by a cumulative 30% to $15.5 billion. However, recent headwinds have surfaced. The company's consumer-foods segment reported a sizable decline in volume for the quarter, which the company called "difficult industry conditions." Most likely, the shift in consumer preferences toward more natural alternatives, as evidenced by the Hain Celestial Group's recent profits referenced earlier.
Additionally, a proposed law that requires the labeling of genetically modified foods or ingredients has recently shaken up the packaged-food industry. Seed manufacturer Monsanto Company (NYSE:MON), and food companies like ConAgra will be watching government bills that would require labeling of genetically modified foods (GMO). Connecticut has already passed a bill that requires the labeling of genetically modified foods, and similar proposals are under consideration in Vermont, New Hampshire and Maine. The requirements would be in place to help consumers identify GMO foods so they can make choices that are more informed. Critics say labels would send a message that GMO foods are dangerous when studies so far have mostly shown them to be identical nutritionally to non-GMO foods. The added cost of identifying and labeling such foods could lead to lower margins for food companies.
Typically, stocks in this sector offer investors a relatively low-risk and higher-dividend-yielding investment, and ConAgra shares may seem cheap after the recent pullback. However, the stock recently broke below long-term support, as defined in our real time trading report, which triggered sell signals. Long -term support has now converted to resistance, and as long as shares remain below converted resistance, we expect lower levels. The break of our long term support level is a red flag and not a buying opportunity.