Best Food Stocks to Buy Now: Food stocks are an interesting sector right now. It is led by established companies but there are important newcomers. Mergers and acquisitions are common as brands seek to diversify their product portfolios or break through a plateau.
They can be somewhat faddish – shifting towards different food trends – but also somewhat stable. After all, the population is growing, and everyone has to eat. At the same time, technology is making food production smarter and easier.
However, not just any food stock is a good investment for your portfolio. The company still needs a good product mix that gets traction and operations that are efficient enough to allow the firm to profit despite the small margins typical of the industry.
Here are some of the food stocks on our radar right now.
Coffee Holding Company [Not Starbucks]
The Coffee Holding Company (JVA) is a highly vertically integrated coffee company. It sells coffee products of all sort – from brand retail coffee offerings (e.g., Café Caribe, Café Supremo, S&W) to unprocessed or green coffee, from a single 132-poound bag of coffee to an entire truckload of the stuff.
Overall, the company works to focus on product quality. Coffee Holding has been around for nearly four decades in some form or another – and growing. In recent years, the company has acquired Coffee Kinetics and Comfort Foods as well as formed important alliances through its industry.
On the plus side, Coffee Holding is highly diversified.
By working in mainstream retail as well as specialty outlets, the company can meet a variety of price points. It also works in food service, coffee pods, and more. This allows Coffee Holing to respond to and meet consumer trends.
Further, by dealing in green coffee, the company can exploit economies of scale that would have been inaccessible otherwise.
Coffee Holding’s strategic approach to growth includes new licensing deals, the development of special blend, offering cold brew options, and boosting sales of roasting equipment.
The biggest downside facing Coffee Holding is that its business is commodity-based.
The price of coffee can vary wildly, but the cost to customers, especially long-term ones, may already be set. In a perfect world, this averages out, but if there were a coffee blight or shortage, the company is going to take a hit.
Coffee Holding does keep a variety of derivatives in play to help prevent this issue, but its share price could still be impacted. Economics and politics also come into play as well as investor sentiment.
TreeHouse Foods: Organic Foods = Growth
TreeHouse Foods (THS) manufactures packaged foods and beverages. It has more than 40 production factories spread across Canada, Italy, and the United States.
TreeHouse supplies over 800 grocery stores and foodservice firms. The company makes both private label and branded products as well as organic options. Its brands include Associated Brands, Bay Valley, Cottage Bakery, Linette Chocolates, and Protenergy. TreeHouse had a Snacks division, but it sold that division to Atlas Holdings in 2019.
TreeHouse has three reportable segments:
– Baked Goods: Bakery products, Candy, Cookies, Pretzels, Refrigerated dough
– Beverages: Broths, Creamers, Coffee, Sweeteners, Tea
– Meal Solutions: Baking mixes, Hot cereals, Jams, Macaroni and cheese, Mayonnaise, Pickles, Salad Dressing, Table syrups
TreeHouse’s Meal Solutions are its most profitable business. It brings in 44% of the company’s net sales while Baked Goods account for 34% and Beverages for 22%.
This is a solid diversification mix, but investors should know that the bulk – almost 58% – of TreeHouse’s revenue comes from only ten customers. Losing one of those accounts could be catastrophic for the company.
Meeting demand consistently and developing foods that meet current dietary trends is one of TreeHouse’s biggest challenges.
Farmer Brothers Company Roasting Makes Money
Farmer Brothers (FARM) is a coffee roaster and distributor.
The company has three tiers – Premium, Specialty, and Value. Its brands include Farmer Brothers, China Mist, Boyds, Un Momento, and Cains.
Farmer Brothers products feature in restaurants and food service as well as hotels, grocery chains, and coffee houses.
Its client network is wide – but don’t think of this stock as a one-trick pony.
Farmer Brothers also deals with more than coffee. The company sells spices, teas, and baking mixes in addition to different value-added services such as market insights. Farmer Brothers is diversified.
Its top five customers account for just over 13% of its sales.
Farmer Brothers differentiates itself in several ways. One is by offering a wide range of products and packaging options. However, its product offerings are only part of the equation.
The company offers next-level inventory management, direct store delivery, support for merchandising, market insights, easy product reordering, and beverage equipment placement services. It is a one-stop, hassle-free shop for hot beverages.
The challenges facing Farmer Brothers are common to coffee roasters – coffee is a commodity, so the price fluctuates considerably. Competition is also intense. The company could lose business to a cheaper rival, an alternative product, or a higher quality hot beverage. There is a matter of maintaining a steady supply of coffee too. Coffee is grown in some of the most politically unstable areas of the world.
Performance Food Group On A Tear
Performance Food Group (PFGC) markets and distributes foodstuffs.
It has over 160,000 items in its portfolio and more than 170,000 customer locations.
The company’s customer mix includes retailers as well as hospitals and schools. In 2019, Performance Food announced that it would acquire Reinhart Foodservice. It also announced that it would operate as two reportable segments.
– Foodservice: This includes grocery stores, restaurants, and institutional customers, such as Chili’s, Cracker Barrel, Mellow Mushroom, Outback, Red Lobster, Ruby Tuesday, Shake Shack, Subway, TGI Friday’s, and Zaxby’s.
– Vistar: This segment is the company’s largest. It represents vending locations as well as retailers, convenience stores, and coffee service distributors, including Cinemark, Dollar Tree, Home Depot, Regal Cinemas, and Staples.
Administrative costs are no longer reported at the segment level but are instead in another segment Performance Food calls Corporate & All Other.
The company is well-protected through its product mix.
None of its 5,000 suppliers account for more than 5% of the goods Performance Food sells.
It also puts an emphasis on differentiating itself from competitors through a robust supply chain and low prices. Of course, like most food companies, the margins are thin. This one just happens to be large enough that it has economies of scale to exploit.
Sanderson Farms Turns Chickens Into Profits
Sanderson Farms (SAFM) is a chicken company. It processes and sells chicken in different forms – from fresh to frozen and all the processed chicken items in between.
In FY2019 alone, Sanderson processed 623 million chickens, making it the third largest producer of chicken items in the United States.
Fresh vacuum-sealed chickens are Sanderson Farms’ biggest business. In FY 2019, sales of those products account for over 38% of company sales.
Chill-packed chicken is the next most valuable segment, contributing almost 33% of the annual revenue. Fresh bulk-packed chicken is next at 14.4% followed by frozen chicken at 6.2%.
Ice-packed chicken and minimally prepared chicken make up the rest.
Chicken is a common food staple in the United States, but the price per pound can vary considerably over time and throughout the year. Sanderson Farms negotiates some of its prices or using contracts that treat the chicken like a commodity.
Chicken tends to be most expensive in the summer months and least expensive in the winter. Feed prices come into play as well as quality assurance.
Sanderson Farms mostly sells its chickens to supermarkets and distributors but some of its customers are casual dining establishments or foreign.
By dealing with a variety of customers and offering a range of products, the company can reduce volatility in sales, shifting and adapting, as necessary.
JM Smucker Owns Iconic Brands
JM Smucker (SJM) or Smucker’s as it is commonly known, focuses on a narrow niche – Making and marketing food and beverages.
The brands in the company’s portfolio are nothing short of iconic. Smuckers includes brands like its namesake, Café Bustelo, Crisco, Dunkin’ Donuts (the supermarket retail brand, not the fast food restaurant chain), Folgers, Jif, Meow Mix, Milk-Bone, Pup-Peroni, and Uncrustables.
In recent years, Smuckers has undergone some changes. In 2018, it acquired Ainsworth Pet Nutrition, maker of Rachel Ray pet food, for $1.9 billion further bolstering its pet product line.
Smuckers had bought Big Heart Pet Brands in 2015. At the same time, the company sold off its baking business, which included Hungry Jack, Martha White, and Pillsbury.
At the end of fiscal 2019, Smuckers had four segments: Coffee, Consumer Foods, Pet Foods, and International Foods, with the first three segments making up some 86% of sales.
Smuckers has a few things working against it. Most of its products are made using commodity ingredients, so the cost of goods is constantly in flux. At the same time, while the company’s costs may be inconsistent.
The pricing for its products – many of which are family staples – has to be very consistent. This puts some pressure on the company and can mean tight margins.
However, if the commodity price of the product goes lower than forecasted, Smuckers could potentially pocket a higher margin on that run.
Further, the company’s top ten customers make up 60% of its revenue, and 32% of that is Walmart. That is a lot of eggs to have in one basket.
General Mills Is A Brand Behemoth
General Mills (GIS) also has a strong brand portfolio, made up of over 100 brand concepts, many of which are household names.
This includes Annie’s Organic, Betty Crocker baking mixes, Bisquick, Blue Buffalo pet products, Cheerios cereal, Gold Medal flour, Green Giant vegetables, Haagen Dazs ice cream, Larabar snack bars, Lucky Charms cereal, Old El Paso Mexican food products, Pillsbury refrigerated dough, Progresso soups, Totino’s Pizza, and Yoplait yogurt, amongst others.
Some of these are very recent additions as General Mills sought to better refine its brand. For instance, the company purchased Blue Buffalo in 2018. Per its annual report, it is actively looking for new acquisitions.
Competition in the packaged food industry is highly competitive. Brand loyalty helps but quality and price are important characteristics – and ones that easily work against each other.
Competition comes from other national brands as well as smaller regional companies and store brands. In addition, a disproportionate volume of the company’s sales come from a handful of companies.
Walmart brings in 20% of its net sales while PetSmart accounts for 36% of the company’s pet segment. Going forward, General Mills is currently pushing four segments – ice cream, snack bars, Old El Paso, and organic goods.
Flowers Foods Makes Baked Goods At Scale
Flowers Foods (FLO) is a baked goods company. It makes bakery products like bread, rolls, and snack cakes. Some of the brands in its portfolio include Sara Lee, Sunbeam, Tastykake, and Wonder bread.
Direct store delivery accounts for 85% of the company’s business while warehouse delivery makes up the rest. Around 38% of its business is grocery stores.
However, mass merchandisers or discount stores and foodservice make up a considerable amount of Flowers Foods sales at 31% and 22% respectively.
Over 76% of its annual revenue comes from breads and rolls. Snack cakes are next at 16%, followed by frozen bread products (7.5%).
Since 2017, Flowers has been focusing on investing in its core businesses and streamlining its offerings. The company has also been looking at adjacent product opportunities and ways to reduce complexity in its operations, overall.
Flowers believes that if it can become more centralized and focused on analytics, the better able it will be to reduce its operating costs. This is all part of what the company calls Project Centennial.
Flowers expects to boost sales growth by as much as 4% through these efforts. The transition to this new way of operating is expected to conclude by fiscal 2021.
Beyond Meat Skyrocketed Post IPO
Beyond Meat (BYND) is one of the fastest growing companies in the food industry right now. It sells plant-based meats that it says allows people to experience the taste and texture they enjoy from meat products while enjoying the nutritional, environmental, and ethical advantages of a plant-based diet.
The company competes against plant-based protein companies like Boca, Gardein, and Lightlife as well as meat companies – making its potential market huge. The meat industry alone is a $1.4 trillion business.
While Beyond Meat is very new, environmentally and health conscientious consumers could help this company take over a small piece of that market.
So far, the company has posted numbers that were in the red during almost every single quarter since it began, but Beyond Meat is expanding its production capacity so some loss is expected.
Best Food Stocks To Buy: The Bottom Line
Investing in food stocks requires research. Before you buy shares in a company, make sure you understand what it does and who it serves. Some food stocks may not be popular in the long run – but you won’t know until you dig in and see how the company generates its business.
The food industry is ripe for investment (pun intended) as long as you do your research. New trends in carbohydrates, proteins, and vegetables are creating entirely new markets and opportunities. Take pasta as an example. Where before it was always made using carbs, now gluten-free pasta and cauliflower/veggie pasta options are available. These are just the tip of the iceberg of what’s to come.
The author has no position in any of the stocks mentioned. Financhill has a disclosure policy. This post may contain affiliate links or links from our sponsors.
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