Thought Food Stocks | Looking for Alpha


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Investment opportunities spread across the picnic table. Over the past few years, investors have grown accustomed to the tech sector dominating the broader market. But just because technology has dominated the market for so long doesn’t mean it will continue. to do so in the future. Sector performance has traditionally rotated steadily over time, with former leaders becoming future laggards and former laggards becoming future leaders. This sector rotation is happening over time for good reason, and the market has now entered a phase where the long-neglected packaged food industry within the consumer staples sector has become more palatable.

Breaking down the business cycle. Why has the tech sector dominated the market for so long? It was partly a byproduct of Fed policy and its effects on the business cycle. Many segments of the business cycle are not necessarily well suited for the technology to work well. But because the U.S. economy remained chronically stuck in a phase of slow-to-improve economic growth, aided in part by persistently accommodative monetary policy, the economy remained stuck in what looked like a phase of recovery. early to intermediate expansion. This then supported a stock market in a mid-term bull market, which is the sweet spot of the business cycle and market cycle for tech stocks to perform especially well.

Of course, a lot has changed with our place in the economic cycle since the end of 2021. A sharp rise in inflationary pressures quickly forced the Fed to abandon its ultra-loose monetary policy marked by zero interest rates and a quantitative easing towards a firm tightening approach to slow the economy and curb mounting price pressures. This sea change has accelerated us along the economic cycle towards an economy that is now peaking and beginning to reverse. And the fact that markets traditionally move several months ahead of the economic cycle may help explain why the US stock market has been struggling since late last year after peaking in early 2022.

Consumer Staples, not Technology, is the sector that has historically performed best during this specific phase of the business cycle. This is largely because these more defensive companies are more likely to offer the predictability of earnings and persistence of stock price growth, along with relatively lower stock price volatility and the potential ability to pass on higher prices on consumers, which is particularly attractive to investors. in this more uncertain economic phase. Within the consumer staples sector, packaged food companies have historically shown a propensity to perform particularly well during these times. After all, while many of these companies continue to work through varying degrees of operational restructuring, the one thing we all need to do more than anything else, regardless of what may be happening in the economy at any given time , is to eat.

food for thought. Let’s take a closer look at packaged food stocks and their performance since the US stock market peak at the start of the year. The S&P 500 Index includes twelve companies in the packaged food industry. These are listed below:

Mondelez (MDLZ)

General Mills (GIS)

Hershey (HSY)

Kraft Heinz (KHC)

Tyson Foods (TSN)

McCormick (MKC)

Kellogg (K)

Conagra Brands (CAG)

Hormel Foods (HRL)

JM Smucker (SJM)

Campbell’s Soup (CPB)

Lamb Weston (AG)

It should be noted that each of the companies listed above has an investment-grade credit rating of BBB- or better from S&P, with the exception of Conagra spin-off Lamb Weston, which is set to become BB+. Each also offers a dividend with an average yield of 2% across the group, many of which have a long-term history of increasing their payout each year. And all but two of the names — Tyson Foods and Lamb Weston — rank in the bottom quintile of stocks for price volatility in the S&P 500. In short, packaged food companies like these fit the types of stocks that attract investors at this stage of the business. cycle.

History of food outperformance during similar past phases. This leadership of packaged food stocks during and beyond economic peaks is nothing new, as this market segment has shown the propensity for markedly positive absolute returns and relative outperformance during past difficult episodes.

For example, during the first two years after the tech bubble burst in March 2000 through late spring 2002, the ten stocks in the packaged foods list above that were actively trading at the time ( Kraft Heinz was two separate companies in Kraft Foods and HJ Heinz, while Lamb Weston was still part of Conagra) generated an equal weighted positive return of nearly +60% at a time when the broader S&P 500 had fallen nearly -40% at this late stage of the bear market at the time. The following table shows some notable names of the group during this period 2000-2003.


After the onset of the financial crisis in 2007, this packaged food group was collectively only -10% lower until November after the collapse of Lehman Brothers against the S&P 500 which was more than -40 lower. % at this point in the bear market. . This includes three stocks that were trading consistently higher over that same period – General Mills, Kellogg and Campbell Soup. The following table contains some additional food group names during this 2007-2009 period.


Many of these packaged food stocks even fared well on the onset of COVID in early 2020. While the weighted average overall group traded lower during this period, seven of the twelve names in the group in the packaged food industry traded higher in the first month. after the onset of the global COVID outbreak from mid-February until days before the broader market bottomed out on March 23 of that year. The following chart shows a number of those names that held in positive territory late into the COVID correction.


So how have these stocks fared since the broader market peak in early 2022? Overall, these twelve stocks have generated an equal weighted average return of nearly +3% in a broader market that is more than -13% lower over the same period to date. The chart below shows some of the group’s recent winners.


Not too bad in terms of relative outperformance in what has been a tough market environment. Additionally, these packaged food inventories were collectively higher by more than +10% earlier in May before disappointing sales results from Walmart (WMT) and Target (TGT) impacted these inventories since the mid-2010s. month.

At the end of the line. While the broader S&P 500 Index has struggled throughout 2022, a number of sectors and industries continue to perform well and generate positive returns. The packaged food industry in the consumer staples sector falls into this group. And given where we are in the business cycle, investors might be well served to look beyond the technology that is increasingly fading into the rear view mirror of the business cycle and instead focus their attention on equities. that stand to benefit the most from where we are in the current economic cycle as well as the sectors and industries that will benefit the most from our next direction.


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