What do contrarian food stocks and football have to do with each other? Let me explain…
NFL playoff season has finally arrived, so I’ve been watching a lot of football. Who would have guessed that the previously hapless Cleveland Browns, in disarray since their re-start in 1999, would chalk up their first playoff win in a quarter-century with a dominating victory over arch-rival Pittsburgh Steelers on Sunday? And it’s thrilling that the chronically struggling Tampa Bay Buccaneers, now led by perennial champion quarterback Tom Brady, knocked off Washington 31-23.
What makes the playoffs so exciting? For me, and of course for Cleveland and Tampa Bay fans, and perhaps many others, is that the underdogs can execute an unexpected turnaround. An upset victory is even more satisfying as it is harder and less popular than cheering for the favorite. As a contrarian investor, I find that not only are the psychic rewards of an upset “win” higher, the financial payoffs from buying out-of-favor stocks tend to be greater, as well.
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Some packaged food stocks, which make a lot of the foods that I enjoy (maybe just a bit too much) during a game, have been quietly slipping out of favor. Understandably, investors are looking ahead to a post-pandemic world in which consumers may slow their comfort food and eat-at-home habits. And it’s hard to get excited about a cereal company’s long-term prospects compared to those of hyper-growth tech, electric vehicle and service companies coming public through white-hot IPOs and SPAC deals.
But highly-favored and trendy stocks won’t all be successful, and an uptick in interest rates or the arrival of new competition could send many of them to the compost bin. And a few food companies are undergoing turnarounds that can sustain their recoveries despite the headwinds.
Let’s review three contrarian food stocks that look particularly promising.
3 Contrarian Food Stocks to Consider
General Mills (GIS), one of the largest packaged food producers, has a portfolio of impressive brands including Chex, Pillsbury, Haagen-Dazs, Betty Crocker and Yoplait. Its Blue Buffalo pet food segment is a category powerhouse with relatively strong growth. General Mills’ brands and scale provide it with valuable shelf space and marketing leverage. Under relatively new CEO Jeff Harmening (since January 2018), the company has introduced innovative and healthier products and stanched its previously chronic market share losses. GIS shares trade at only 15x forward earnings. Estimates continue to tick upward, providing some confidence in the outlook. The shares offer an attractive 3.6% dividend yield.
Kraft Heinz (KHC) lost its way following its 2015 combination with Heinz. The company’s over-zealous use of zero-based budgeting, in which every expense must be justified every year, led to industry-leading margins in the near term but sacrificed future growth and relevance. As a result, KHC shares collapsed in early 2019. In a way, this was fortuitous, as it forced the company to shake up its strategy a year before the pandemic. Under the leadership of new CEO Miguel Patricio (since July 2019), Kraft Heinz is aggressively rebuilding the company’s relevance, market share and profits. There is considerably more work ahead, and Kraft needs to pare its elevated debt, but the turnaround remains on track. Trading at 13.3x forward earnings (aided by rising earnings estimates) and sporting a 4.8% dividend yield, Kraft Heinz’ turnaround still looks appealing.
Rightfully dismissed years ago as having stale brands, Conagra Brands (CAG) has undergone a major refresh since the arrival of Sean Connolly as CEO in 2015. He previously led the impressive turnaround and sale of Hillshire Brands. Connolly’s strategy acknowledges that some brands could be updated to restore growth (Birds Eye, snacks, frozen meals) while others should become cash cows. The company also divested several brands that didn’t fit the new strategy. The market underestimates management’s capabilities and strategy, and the recent sell-off provides investors with a lower-cost entry point. CAG shares trade at a low 13.1x forward earnings and pay a 3.2% dividend yield.
So, as you’re watching the on-field competition between favorites and underdogs as they compete for a spot in the Super Bowl, consider adding these three underdog, turnaround stocks to your investment portfolio.
Bruce has more than 25 years of value investing experience, managing institutional portfolios, mutual funds, and private client accounts. He has led two successful investment platform turnarounds, co-founded an investment management firm, and was principal of a $3 billion (AUM) employee-owned investment management company. Now he is helping his Cabot Undervalued Stocks Advisor readers find those undervalued stocks that let you buy low and sell high!Learn More >>