Add Food to Your Investment Diet

 | Jan 18, 2012 | 10:30 AM EST  | Comments
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Many have New Year's resolutions to limit their food intake, but there is no getting around the fact that we all must eat. Food is a necessity, which is why you would do well to include food companies in your portfolio.

The Food Institute projects moderating pressure on food price inflation in 2012. It says the all-food Consumer Price Index (CPI) is expected to grow 2.5% to 3.5% over 2011 levels.

This is less than the 2011 CPI, which is expected to be in the 3.25%-3.75% range, according to The Food Institute. Lower price pressures should help the industry, since passing on higher prices to consumers has proven difficult.

Globally, the outlook for the industry looks good, as incomes in such countries as China and India increase, which typically boosts demand for food.

Mosaic (MOS) is in a good position to benefit from increasing demand for food products, both in the U.S. and around the world. It does not grow or process food, but is the world's largest supplier of phosphate and potash, two of the three primary ingredients in fertilizer. It has five potash production facilities, 16 phosphate rock mines and plants, and distribution facilities in 10 countries.

Stock market investors value growth, which is why Peter Lynch, one of Wall Street's most successful mutual fund managers, emphasized the cost of growth to the investor when he analyzed stocks. When I automated Lynch's investment strategy and began using it to pick stocks, I gave his P/E/G ratio (price-to-earnings relative to growth) much emphasis -- as did he. To be acceptable, a stock's P/E/G cannot exceed 1.0, meaning the investor is not paying more than $1 for every 1 percentage point of growth. A P/E/G of less than 0.5 is considered very desirable. Mosaic is in this very desirable territory, with a P/E/G of 0.33, based on a P/E of 10.52 and a growth rate of 31.44%, based on the average of the three and four-year historical earnings-per-share (EPS) growth rates. Also in the company's favor: a low debt limit and good management of inventories.

Darling International (DAR) does not produce food as much as it uses food to make such products as animal feed, meat products, paint, cosmetics, soaps, pet food and other products. It does this by processing animal byproducts, which it collects from restaurants, grocery stores, butcher shops and meat and poultry processors. It converts these into oils and proteins that are used by the agricultural, leather and oleo-chemical industries.

Like Mosaic, Darling is a favorite of the Lynch strategy. In fact, as impressively low as is Mosaic's P/E/G, Darling's is even a shade lower at 0.31, based on its P/E of 10.35 and its growth rate of 23.91%, which is the average of the three, four and five-year historical EPS growth rates. Also in its favor is a moderate debt level.

The final food-related company I will discuss is one you have heard of and think of as a traditional food company, Kellogg (K), the world's leading producer of cereal, as well as a producer of other convenience food products. Its product line includes Corn Flakes, Rice Krispies and Pop-Tarts and is sold in more than 180 countries.

Kellogg is favored by the strategy I based on the writings of James P. O'Shaughnessy, a noted Wall Street theorist, researcher and mutual fund manager. This strategy likes the company's large market cap ($18.2 billion), earnings per share which increased in each of the last five years and a price-to-sales ratio of 1.4, a bit below the 1.5 maximum allowed. Those stocks that pass these three hurdles are then analyzed by their relative strength, which is a measure of how well a stock has performed relative to the rest of the stock market during the past 12 months. The strategy picks the 50 stocks that pass all the previous criteria and have the highest relative strength. Kellogg's relative strength rating of 63 puts it in this top-50 group.

If you want to capitalize on the strength of the food sector, these three stocks offer a good range of diversity and companies with solid track records.

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