Food Companies for Thought

 | Oct 04, 2011 | 4:58 PM EDT
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One thing we all must do is eat. Whether the sun is shining or the stock market is gyrating, food is a constant, which is why companies involved in various aspects of food processing are potentially good investment bets.

IDC Research conducted a survey of the food and beverage industry and found that respondents are optimistic regarding the growth of their companies in 2011. "Growth in the industry has been strong since 2004 due to increased consumption and demand for healthier products," the survey said.

To choose stocks, I use guru strategies, which are computerized analyses built on frameworks described by notable investors in their writings. A testament to the strength of the food processing industry is the fact that several members of the industry get accolades from these strategies.

Bunge Limited (BG) is one such company. It is in the business of buying crops such as soybeans, wheat and corn, then processing them and selling the resulting products to food and feed companies. In business since 1818, Bunge is the leading oilseed processor in the world. It operates in four business segments: agribusiness, sugar and bioenergy, food and ingredients, and fertilizer. Bunge does business in about 40 countries.

The guru strategy that favors Bunge is one modeled on Peter Lynch's writings. It emphasizes the price-to-earnings ratio, or PEG, relative to growth, and measures how much the investor is paying for growth. A PEG of 1.0 or less is acceptable, and below 0.5 is great. Bunge is in great territory with a PEG of 0.25, based on a growth rate of 32.5% and a price-to-earnings ratio of 8.20, which is the average of the three-, four- and five-year historical earnings-per-share growth rates. The company is also doing a reasonable job of managing its inventory and debt is at an acceptable level relative to equity.

Another company in the food processing business that gets a high grade from a guru strategy is ConAgra Foods (CAG). You may not be that familiar with ConAgra, but you are likely very familiar with some of its product names, including Reddi-Wip whipped cream, Orville Redenbacher popcorn, Hebrew National meat products, Hunt's canned tomatoes, Egg Beaters egg products, Chef Boyardee Italian food products and Wesson oils, among others.

I use a strategy based on the writings of James P. O'Shaughnessy, and this strategy gives ConAgra high grades. It likes the company's market cap (nearly $10 billion), earnings per share, which has increased in each of the past five years, price-to-sales ratio of 0.79 (1.5 is the maximum) and relative strength of 80 (this is a measure of how well the stock has performed relative to all stocks during the past year).

Flowers Foods (FLO) is also a favorite of the O'Shaughnessy strategy. Flowers is a leading packaged bakery producer whose products include Nature's Own, Sunbeam, Aunt Hattie's, Tastykake, Mi Casa, Bunny and Cobblestone Mill. In Flowers' favor, it has a market cap of $2.6 billion, earnings per share has increased each of the past five years, a price-to-sales ratio of 0.98 and a relative strength of 83.

To spice things up, I will tell you about McCormick & Co. (MKC), a world leader in the spice, herb, seasoning and flavorings market. This company, like Bunge, is a Lynch-strategy favorite. McCormick's PEG is 0.92, and it is doing a good job managing its inventories. It is dominant in its industry, which is also a plus.

Food is on everyone's plate, if not in his or her investment portfolio. These are excellent companies that should perform well, even if the market does not.

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we like this chart here, it appears ready to move higher. BOUGHT BZUN OCT 35 CALL AT 3.40
Large-cap, high-quality McKesson (MCK) is too cheap now, at $147.51 or so. The stock hit $243.60 more than 2.5...



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