The COVID-19 pandemic has seen a resurgence in recent weeks and talks of normalcy are still far away, even with the vaccinations. For investors, it is a mixed feeling with some already hedging for the times when the stocks will find their true levels away from the volatility of the pandemic.
One such sector that has seen mixed reactions is the packaged food industry. Packaged food benefitted with people turning to them during the lockdowns.
But there has been a downturn in the stocks with many investors looking to times when Americans will edge back to pre-COVID habits. The food stocks have been trading at a discount to other staples. Analyst John Baumgartner writes that food stocks have been trading at a discount to other staples, as investors “continue to price in a return to structural decline (or at least a lack of growth) following an expected ‘one-hit-wonder’ benefit from COVID in 2020.” He adds that the sector’s “underlying execution remains far better than the Street gives credit,” and that food stocks will remain stronger for longer in 2021.
Milka Chocolate Bunnies (Image Credit: Pixabay)
Also, there are worries that investors are more attracted to rising bond yields that pay attractive dividends. Wells Fargo also believes there’s still value in the sector.
Investors are worried that once the vaccination drive is well underway, people will again adopt the earlier habits of dining out and healthier cooking at home, rather than relying on packaged foods.
But the post-COVID reality might be different. The restaurant business has taken a hard hit during the Pandemic with almost 15% of restaurants closed almost permanently. The remote work culture is also here to stay. So people will not be in any hurry to go back to the old ways and might be looking to adopt the new culture. Packaged food spending is bound to be high for the near future, believe analysts.
Baumgartner argues that analysts are underestimating 2022 sales and profits for some of the biggest packaged-food players and that he is “highly confident …will be beaten.”
What the packed food industry should do is seize this opportunity and make value additions, innovate, come up with new marketing and management plans. Analysts might not be pricing in these opportunities while trading these stocks at a discount.
Baumgartner’s top picks for 2021 are Mondelez International (MDLZ), which is seeing global growth, but a low valuation; Simply Good Foods (SMPL) and Nomad Foods (NOMD), which are in the early innings of growth; and General Mills (GIS) and Kraft Heinz (KHC), two companies whose “growth is anything but flat.”
Food stocks are best represented by the S&P Food & Beverage Select Industry Index, though it does include alcohol companies. The index has underperformed the broader market over the past 12 months, providing a total return of 21.1%
According to Investopedia, the food stocks with the lowest 12-month trailing price-to-earnings (P/E) ratio are Ingles Markets Inc, Carrefour and Albertsons Companies Inc. Their P/E ratios are 5.4, 7.5 and 7.7, respectively.
Food stocks with the highest year-over-year (YOY) earnings per share growth for the most recent quarter are JBS SA, Maple Leaf Foods Inc, and George Weston Ltd.
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