This post is the latest in a series following the criteria defined in "4 Characteristics of Outperforming Stocks in a Post QE2 Market."
Regardless of how the economy or market is doing, people will always need to eat. The food industry within the consumer staples sector offers one of the largest opportunity sets for stock investors in the Post QE2 market environment. The following is a review of the ten food stocks that are positioned well based on the criteria defined in the post cited above.
Kraft Foods (KFT)
Market Cap: $60.1 billion
S&P Quality Ranking: A-
P/E Ratio: 19.9
Dividend Yield: 3.4%
Kraft is one of the largest packaged food companies in the world with more than $50 billion in annual sales. While Kraft’s operational performance has been spotty in recent years and the company is still in the process of digesting the Cadbury acquisition, it is a strong free cash flow generator and has the potential to increase efficiencies going forward. From a technical perspective, Kraft stock has behaved very well over the last year. During the “QE Pause” last year, the stock never broke its 200-day moving average while continuing its upward price momentum throughout the period. Overall, the stock has successfully tested support at its 200-day moving average eight times in the past year and bounced higher in each instance.
Trading Strategy: Kraft stock is currently a bit ahead of itself. A pullback to its 200-day moving average (currently $31.39) or its previous resistance in the $31.50 to $32.00 range would represent a favorable entry point. The P/E ratio would fall as low as 18.3 under this scenario, which would represent a 6% discount to its historical valuation.
HJ Heinz (HNZ)
Market Cap: $17.2 billion
S&P Quality Ranking: B+
P/E Ratio: 17.5
Dividend Yield: 3.6%
The ketchup maker has been an improving performer in recent years. After some spotty operational results earlier last decade, Heinz has been successfully transforming itself to become more lean and efficient. The company is also a big free cash flow generator, which enables it to maintain a more leveraged capital structure. From a technical perspective, Heinz stock worked through some choppy price movement during the Post QE1 period to essentially hold its ground before entering into a healthy advance during the QE2 rally since last August. Along the way, the stock has found support at its 20-day moving average during sharp rallies and at the 150-day and 200-day moving averages during consolidation periods including the “QE Pause” period last year.
Trading Strategy: Heinz stock still trades at a 5% discount to its historical valuation even after its healthy post QE2 advance. However, the more volatile price performance during the Post QE1 period offers reason for pause, particularly given that Heinz stock is currently coming down from vastly overbought technical levels. As a result, it may be worthwhile to monitor Heinz as we move past the end of QE2 on June 30. Any Post QE2 pullbacks to the 150-day or 200-day moving average with technical readings at oversold levels may provide a particularly attractive entry point even from a trading perspective.
Hormel Foods (HRL)
Market Cap: $7.7 billion
S&P Quality Ranking: A+
P/E Ratio: 16.8
Dividend Yield: 1.8%
It doesn’t get much more defensive than Spam. Hormel Foods is a meat processing company that makes packaged products including Dinty Moore and Jennie-O turkeys. The company is a solid operational performer that has steadily grown revenues and increased operating and profit margins in recent years. Hormel is also a solid free cash flow generator and has a consistent track record of raising its dividend year after year. From a technical perspective, the stock was completely unaffected by the “QE Pause” last year, posting an uninterrupted +11% rise with the S&P 500 (SPY) down -13% over the same time period. Overall, the stock has found solid support at its 50-day, 75-day and 150-day moving averages for well over the past year.
Trading Strategy: A lower entry point would be preferred before purchasing Hormel Foods stock. Although the valuation is currently on par with its historical average, the trajectory of the stock price over the past year has been on an increasing slope, which raises some concerns about the sustainability of further upside in the coming months. The stock recently broke support at its 50-day moving average, but immediately held at its 75-day moving average. Any Post QE2 pullback to the 150-day moving average would provide a more appealing entry point.
Market Cap: $6.5 billion
S&P Quality Ranking: A+
P/E Ratio: 17.4
Dividend Yield: 2.3%
McCormick is by far the dominant player in the global spices and seasoning industry. This positioning in a defensive market segment provides many of the competitive advantages to operational performance that would be expected for the company. McCormick performs well from an operational standpoint, is a strong free cash flow generator, has a favorable capital structure and has a long track record of raising the dividend. From a technical perspective, the company was largely unaffected by the “QE Pause” last year and has continued its strong advance during the QE2 rally. The stock has enjoyed steady support from its 20-day, 100-day and 150-day moving averages along the way.
Trading Strategy: McCormick stock currently trades at an over 10% discount to its historical valuation even after its strong price performance over the past year. A case could be made for purchasing a position at the 100-day or 150-day moving averages, particularly with an RSI below 40, an MACD near -0.25 and a Money Flow reading at -0.2. These readings have signaled a bottom in McCormick’s stock price over the last few years.
JM Smucker (SJM)
Market Cap: $9.1 billion
S&P Quality Ranking: A+
P/E Ratio: 18.4
Dividend Yield: 2.3%
Smucker operates in defensive categories like jelly, peanut butter and coffee. The company has undergone a fair number of changes in recent years, which raises some issues from an operational standpoint. Most notably, the company carries a great deal more debt than it did only a few years ago. But it’s still a solid free cash flow generator and it's not as though people are going to stop eating peanut butter and jelly sandwiches during a recession. Smucker is also a bit less exciting than some of the others on this list from a technical standpoint. Price performance was certainly choppy during the “QE Pause” last year, although it did manage to hold close to even before it was all said and done. And it has seen strong support along the way at its 20-day, 100-day and 300-day moving averages along the way. Its performance during the QE2 rally starting last August, has been impressive, particularly since breaking out above the $65 per share level in February 2011. However, the stock price is now well ahead of itself, as it is currently trading at a 10% premium to its historical average valuation.
Trading Strategy: A good deal of steam would need to come out of Smucker’s stock price before considering a purchase. Given the current premium valuation coupled with the volatility that the stock experienced during the Post QE1 period, it would be worthwhile to wait until QE2 comes to an end on June 30, to see how the stock price performs. Any Post QE2 pullbacks to the 300-day moving average with an RSI at or below 30 would provide a potentially attractive entry point. This would represent a 20% correction in Smucker’s stock price from current levels, which would bring the multiple down to a more reasonable 15x earnings.
Campbell Soup (CPB)
Market Cap: $10.9 billion
S&P Quality Ranking: A-
P/E Ratio: 14.0
Dividend Yield: 3.4%
My recent post "Campbell Soup: 5 Reasons the Stock Looks Hot for Summer" from May 24, 2011, provides a detailed analysis on the company.
Trading Strategy: Campbell Soup stock has broken out above its previous downward sloping resistance line. Although it recently did not hold support at its 200-day moving average, it recently bounced strongly off of what is now its downward sloping support line. Given that the soup maker was one of the best “QE Pause” performers, gaining +5% in a broader market that was down -13% as measured by the S&P 500, the stock continues to appear attractive at current prices with a valuation at a near 20% discount to its historical average.
General Mills (GIS)
Market Cap: $24.3 billion
S&P Quality Ranking: A
P/E Ratio: 15.2
Dividend Yield: 3.0%
General Mills ranks as one of the world’s largest food companies focusing in food segments such as cereal, baking and ice cream. Following a generally lackluster operational performance during the first half of last decade, the company has generated improving results in recent years. Cash flow generation is also solid, the capital structure is fairly well balanced and the dividend has been on the rise in recent years. From a technical perspective, the stock price performance has been a bit more erratic. After holding up very well initially following the end of QE1, it pulled back fairly sharply throughout the summer of 2010, before finally finding support at its 300-day moving average. In the months since the QE2 rally, it has found support at this 300-day M.A. level several times and finally managed to break out through upside resistance in the $37 per share range in April 2011.
Trading Strategy: General Mills stock price has pulled back in recent weeks since peaking in mid May at $40 per share. It recently held at its previous resistance (now support) in the $37 per share range, although more time will be needed to tell if it can truly hold its ground at this level. The fact that the company trades at an 8% discount to its historical valuation and seems to show little regard whether QE is on or off are factors that work in its favor from an investment standpoint. It could merit additional consideration if it holds support in the $37 per share range or tests its 300-day moving average with an RSI toward 30 and an MACD below -0.25.
Market Cap: $109.9 billion
It surprises some to learn that PepsiCo is far more than a soda company, boasting some of the world’s leading brand names including Frito-Lay, Quaker Oats, Tropicana and Gatorade. The company has been a steady operational performer, continues to generate strong cash flows and has a consistently increasing dividend. As for the stock price, it has been traveling in several trading channels over the last year. After banging around in a channel between $58 and $65 during the “QE Pause” last year, it moved up to a slightly higher channel between $61 and $66 during the QE2 rally. It was not until late April 2011, that PepsiCo stock finally broke out to the upside.
Trading Strategy: Investing in PepsiCo will likely require picking the right spots. The valuation is currently about on par with its historical multiple, so little price movement should be expected from this perspective. From a trading perspective, after peaking at $71 in mid May, the stock price appears to have rolled back over. As a result, it may be setting a new trading channel perhaps between $66 and $72 per share. Overall, the stock seemed little moved by QE1 ending, and seemed to provide a trading opportunity when it hit the bottom end of its trading channel with an RSI below 40, an MACD bottoming below -0.25 and Money Flow dipping into negative territory. Stepping in an buying when these conditions present themselves going forward may provide another short-term trading opportunity in the coming months.
Dr. Pepper Snapple (DPS) Market Cap: $8.8 billion
S&P Credit Rating: BBB
P/E Ratio: 17.0
Dividend Yield: 3.2%
Dr. Pepper Snapple is still establishing its operational identity. After being broken off from the old Cadbury Schweppes in May 2008, the maker of 7UP, Sunkist and Hawaiian Punch has posted solid operating results but is still a distant third in the carbonated beverage industry. However, this provides a growth opportunity for its several market-share leading brands. Technically, after selling off sharply in the early days Post QE1, the stock quickly recovered and subsequently became locked in a trading channel between $33 and $38 per share for the next year. The stock finally broke out to the upside in early April 2011, but has been retreating since peaking at over $42 in mid May.
Trading Strategy: Dr. Pepper Snapple is quickly returning to previous resistance and now current support at the $38 per share level. Given the recent run up and the fact that valuation multiples are currently at around fair value, it would be worthwhile to take a wait and see approach. As a result, Dr. Pepper Snapple is a company that is likely best revisited once we’ve seen how it reacts Post QE2 and what new trading pattern develops if any.
Market Cap: $14.4 billion
S&P Quality Ranking: B
P/E Ratio: 13.7
Dividend Yield: 1.8%
While Kroger is a fine grocery store company, it typically would not make this list. Kroger’s operational performance is strong relative to its peers, but the grocery business is generally challenging and is characterized by somewhat choppy results, relatively less cash flow generation, a meaningful amount of debt and razor thin margins. However, Kroger has been behaving very consistently from a technical perspective, which makes it worth keeping on the radar for a Post QE2 market.
Trading Strategy: Kroger’s stock continues to oscillate fairly widely, regardless of whether QE is on or off. A clear buy signal presents itself when Kroger’s RSI hits oversold levels at 30. Conversely, the stock also presents clear sell signals when the RSI hits overbought levels at 70. This cycle has played itself out three times over the past year, offering the potential for gains in the 15-20% range over a period of two to three months in each instance. It is for this technical consistency that it is worth monitoring Kroger for a potential fourth trading cycle to present itself in the coming months.
My next two posts on the topic will focus on other segments in the consumer staples space.
Disclosure: I am long CPB.
Disclaimer: This post is for information purposes only. There are risks involved with investing including loss of principal. Gerring Wealth Management (GWM) makes no explicit or implicit guarantee with respect to performance or the outcome of any investment or projections made by GWM. There is no guarantee that the goals of the strategies discussed by GWM will be met.