Today, I want to tell you about two of my favorite food and beverage stocks. But first, let’s talk about America’s favorite complement to snacking and drinking beer: football.
We’re only two weeks away from the Super Bowl. Just over a week ago, the exhilarating Division round featured perhaps the NFL’s best playoff weekend in its fabled history. One game after another came down to the final seconds or sudden death overtime. Watching the Cincinnati Bengals squeak by the Tennessee Titans, and seeing Green Bay’s special teams give up, arguably, 16 points in a 3-point game made for mighty nervous fans, me included. And, four touchdowns in the last two minutes of regulation play in the Chiefs-Bills game, followed by a masterful (or crushing, depending on your loyalties) OT touchdown drive? All that, and those tempting food commercials, contributed to a lot of chips and snacks consumption at my house. We probably weren’t the only home like that.
This past weekend, of course, the 7-point underdog Bengals paired up against the Kansas City Chiefs, while the San Francisco 49ers took on the 3.5-point favored LA Rams in a cross-state battle. How did your teams do?
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Regardless of who wins on the field, the big winners are the off-the-field food and beverage companies. Across all sports, every season, around the globe, these companies sell vast amounts of snacks and drinks.
Investors, however, seem to have lost their appetite for many food and beverage company stocks. While rising interest rates continue to drag down shares of trendy hyper-growth tech companies, IPOs and others, shares of rather boring companies remain undervalued. And, while inflation has temporarily crimped their profits, food and beverage companies usually can raise their prices to maintain their health.
Here are two contrarian food and beverage stocks I like right now:
Contrarian Food and Beverage Stock #1: Utz Brands (UTZ)
Utz Brands (UTZ) is the #4 salty snacks producer in the United States, selling its iconic Utz brand of potato chips as well as a range of tortilla chips, pretzels, and other snacks. The 100-year-old family managed company, based in Hanover, Pennsylvania, recently became a public company via a SPAC merger. After some early enthusiasm by hungry investors that took the shares as high as 30 last year, Utz’s stock now trades at half that price. Yet, the company continues to execute on its game plan: expanding its regional distribution toward a nationwide footprint, increasing its operating efficiency, making smart acquisitions, and adding capable new talent. Sales and profit growth look healthy, and Utz generates good free cash flow to help sustain its expansion. Utz appears fully capable of servicing its elevated debt burden. The shares trade at a reasonable 16.4x EV/EBITDA multiple.
Contrarian Food and Beverage Stock #2: Boston Beer Company
A stock chart of Boston Beer Company (SAM) looks more like that of a hyper-growth tech stock than a beer maker. Its shares more than tripled following the pandemic, driven by a surge in revenues from its Truly and other hard seltzer brands. But demand for these beverages turned out to be as only as trendy as meme stocks, and with its overzealous expansion Boston Beer was caught off sides.
Near-term profits have gone flat as the company had to destroy inventory, ramp down internal production while paying expensive fees to third-party contractors, and incur other disruptive expenses to adjust to the new reality. SAM shares have collapsed 70% since the peak. However, Boston Beer will soon again generate sizeable profits and free cash flow, and is backed by a debt-free balance sheet. Demand for its core products remains robust, and even demand for hard seltzers will likely be strong enough to produce enduring profits, although at a much lower pace than previously anticipated. The share price collapse brings the stock back to its 2019 level, leaving the valuation at an attractive 13.8x EV/EBITDA multiple.
So, as you’re watching for on-field turnarounds between favorites and underdogs in next month’s Super Bowl, consider adding a few tasty contrarian food and beverage stocks to your investment portfolio.
Two advisories which I oversee, the Cabot Undervalued Stocks Advisor and the Cabot Turnaround Letter, focus exclusively on buying shares of publicly-traded companies. Each recommended stock is backed by a real business with enduring value that generates real revenues and free cash flow in real currencies. We focus on buying these companies when their cash flows and business prospects are undervalued on conventional, time-tested metrics. Price is what we pay, value is what we get.
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Do you own any food and beverage stocks in your portfolio? Tell us about them in the comments below.
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