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Since my last update, nearly three months ago, the Basic Food Fund, or “BFF,” has risen 6.4% from $182.93 to $194.66 versus an 8.4% increase in the Dow. Its poor relative strength could be attributable to its lower beta status (lower beta stocks drop less in down markets but rise less in up markets) since its components are defensive in nature. Meltdowns in three securities didn’t help matters either, as both Luby's (NYSE:LUB) and Winn-Dixie (NASDAQ:WINN) received 20% haircuts, while CKE (CKR) took a 12% hit. Big winners in the index were The Great Atlantic and Pacific Tea Co. (GAP), soaring 66%, Smithfield Foods (NYSE:SFD) rising 33%, Sara Lee (SLE) up 30% and Tyson (NYSE:TSN) adding 12%.

Kroger (NYSE:KR) replaces LUB:
LUB is being replaced by Kroger as a BFF component. The strongest of the three major traditional national grocery chains, KR’s clean balance sheet, low PE multiple and hefty dividend make it a perfect addition to the fund. LUB’s drop into the abyss (shares must trade above $5 to meet the minimum inclusion requirements) was the catalyst for its elimination.
The revised index price begins at $214.13. The Index was originally devised during last year’s meltdown as a form of therapy to cope with my severe (paper) losses. By putting my thoughts to paper, the pain and anxiety seemed to diminish somewhat. Now, the fund has become more of a “platform” to promote my positions, as I am putting my money where my mouth is!
Component update:
  • SLE: Everybody seems to love Sara Lee these days, as the shares have made another 52-week high. The pie and cake maker has seen a abundance of good news lately: (1) it beat 1st quarter earnings estimates and raised guidance, (2) Unilever (NYSE:UL) bought part of its global body care and household products business for a better than expected $1.9 billion price tag (3) Both Procter & Gamble (NYSE:PG) and SC Johnson have expressed interest in purchasing its air freshener business for as much as $700 million.
  • IPSU: Imperial Sugar (NASDAQ:IPSU) announced a joint partnership to build a new refinery at its Gramercy, Louisiana location. IPSU, Cargill and Sugar Growers and Refiners Inc. will each invest $30 million in assets to build a new state of the art refinery on a 207-acre parcel that IPSU is contributing to the new three way partnership. IPSU’s lone analyst also released bullish research notes and reiterated his $20 target price.
  • BRID: The snack food company, Bridgford Foods (NASDAQ:BRID) made a new 52-week high at $9.99 on news that the company was issuing a ten cent special dividend. Buyers are also banking on further earnings improvement when the company reports its 4th quarter results next month.
  • SFD: Duetsche Securites upgraded its opinion on the pork producer from a hold to a buy, citing improving industry fundamentals, propelling the shares pennies from a new 52-week high.
  • TSN: The company announced a new CEO, Donnie Smith (a longtime TSN executive) and is expected to report fourth quarter sales of $6.88 billion and earnings of 27 cents when it reports Monday. Two recent downgrades from JP Morgan and BB&T Capital Markets have kept the share price in check, but an earnings blowout could set the stage for an impressive rally.
  • CAG: With a 3.6% dividend yield and a multiple of only 13 times 2010 earnings estimates of $1.69, it is no surprise why UBS recently raised its opinion on ConAgra (NYSE:CAG) from a neutral to buy rating.
  • WINN: The Grocer reported poor first quarter results prompting a beating in the share price. As a result, Activist Investor George Schultze, (his Schultze Asset Management firm owns 1.5%) wrote a letter to the Board requesting them to evaluate other alternatives (besides store remodels) to enhance shareholder value, such as a stock buyback or entire sale of the company. We will see how this develops.
  • SWY: Safeway (NYSE:SWY) reported solid third quarter earnings, beating the street by a penny. Although sales were down 7%, the company was still able to expand it gross profit margin by 78 basis points to 28.27% and buyback 23 million of its own shares.
  • GAP: Buyout rumors are fueling this stock’s meteoric rise
  • SVU: SUPERVALU (NYSE:SVU) slashed its annual cash dividend from 70 cents to 35 cents, to help facilitate its decision to double the size of its Sav-A-lot division from 1200 stores to 2400 stores. An initial $75 million has been earmarked for the endeavor. About 75% of the stores are run through license agreements. Even though the dividend was cut by 50%, the yield is still a generous 4.6%.
  • CKR: The burger chain has gotten into a price war with McDonalds and in my unbiased opinion (okay maybe it is just a little biased), is beating them badly. The company’s “Big Carl” is nearly twice the size of MCD’s Big Mac at a lower price, and its famous $6 burger has been slashed to $2.79. The burger chain is also offering a loyalty “rewards” card, giving customers even more incentive to come back. I guess if you can’t beat them, then “undercut them”, by giving the customer twice the product at less the cost. I just hope this strategy does not backfire .The stock is simply oversold and due for at least a “dead cat bounce”.
  • DLM: Selling at one half book value, a forward multiple of 12 times 2010 earnings estimates and a 2% dividend yield to boost, Del Monte's (DLM) stock still appears cheap even after a substantial rise. Wall Street is apparently spooked due to its $1.5 billion debt load, and so am I.
  • FLO: The bread maker, Flowers Foods (NYSE:FLO), reported third quarter earnings of 34 cents, matching analyst expectations, but was short $14 million on the top line due to increased promotional activity. The company revised its fiscal year guidance from $1.43 to $1.40, creating a nice buying opportunity ,as the stock overreacted in a unjustified selling stampede. This one is headed back up to $26.
  • KR: The newest addition to the index, stacks up to be a stellar performer. We shall see.
Bottom line:
It is time to put food stocks on your plate. You won’t get rich overnight in these types of companies, but you certainly will be able sleep better, holding these conservative, low risk securities. Most of them have fairly low multiples and decent dividend yields. They are not overburdened with debt and are in an industry we cannot live without - “FOOD”.
Disclosure: Long each of the fourteen components making up the index
Source: Food Stocks Deserve to Be on Your Plate