Hard to Swallow

 | Dec 18, 2013 | 2:55 PM EST  | Comments
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Stock quotes in this article:

wfm

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cost

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aapl

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chl

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mcd

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cmg

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wmt

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hain

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gis

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bnny

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cpb

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k

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cag

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ko

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pep

We are witnessing a change of historic proportions in the food and restaurant businesses. It's something that's taking major companies and their analyst acolytes by surprise. Neither saw the change coming and they are now wising up to it. I'm talking about the revolution in eating, a wholesale change in what we are willing to put in our bodies because younger people, the millennials, have figured out the dangers of the chain that supports the processed-food industry and they are dragging the rest of us with them, kicking and screaming as we go.

I've consistently been thinking about this incredible change for some time. It's a big theme in Get Rich Carefully, where I recommend investing in stocks benefitting from this theme for the long term. It's the type of secular shift that's sneaking up on analysts because it's not something that they are used to, or even comfortable with.

But it's happening nonetheless -- something that's obvious if you read Whole Foods' (WFM) annual, as I did in preparation for sitting down with the company's co-CEOs on the occasion of opening of its Brooklyn store. Right up front is a declaration that people are much more savvy about what goes into the food they eat than they used to be and have figured out the link between diet and health, and they aren't going back to their old ways. It's something that Costco (COST) CEO Craig Jelinek told us has made that terrific chain go all in on natural organic, recognizing that it's no fad.

I feel fortunate that the execs who are surfing this wave recognize my keen interest in the wholesale shift from eating what tastes good to what's good for you that also tastes good. But like many things about investing, I just got lucky. I have two kids who showed me the way, just as they did when they urged me to buy nothing but Apple (AAPL) products when the stock was in the $50s, demanding several iPods with different colors because they were the ultimate in fashion accessories. (For the record, I'm not fretting Apple shares falling today because of some extrapolation from a contract manufacturer's orders being down. I don't know how many of those orders are really Apple's, or if Apple took the business away from them. Nor am I concerned that China Mobile (CHL) may have a deal with Apple. And I am confident that previous press reports couldn't be as wrong as they sound.)

Back to the matter at hand. For the longest time, one of my daughters was a committed vegan and the other a vegetarian. Both have a revulsion to the processed food chain. They despise McDonald's (MCD), thinking that it is a horrendous place to eat. They would drive miles out of their way for a Chipotle (CMG) vegetable burrito, which they regard as pure and organic a meal as can be had when eating out.

They used to love the salad at Darden's (DRI) Olive Garden but now eschew it for the healthier -- at least in their eyes -- classic salad from Panera Bread (PNRA). They never drink soda of any kind, diet or regular, which they will lecture you about if you flaunt a soda in their direction. They live for water and prefer Brita-filtered water so they use less plastic. They don't like anything canned or frozen. Unless it's fresh, they won't eat it. They prefer tofu to just about any other food except fruits and vegetables. In our house, Tofurky is a delicacy that worked just fine for Thanksgiving a couple of years ago.

They are the reason I started shopping at Whole Foods and then started recommending the stock eons ago. I did so out of respect to their ethos and their beliefs.

Whole Foods is their Good Housekeeping seal of approval; if it's sold at Whole Foods, it must be good. The corollary is true, too. A few years ago, I took my daughter to a Wal-Mart (WMT) store in North Adams, Mass., to pick up rice cakes for her dorm. They didn't sell them. Instead, a very nice clerk took us to the aisle where they sold Rice Krispies Treats. I know that Wal-Mart has embraced natural and organic and has become a huge customer of Hain Celestial (HAIN), but I don't know if my daughter will ever shop for food there again, except perhaps with a gun to her head.

This brings me to today's news from General Mills (GIS). It reported very disappointing quarterly numbers this morning and gave myriad reasons for the weakness, including inflation costs and currency fluctuations.

When I was growing up, General Mills was the equivalent of what Whole Foods is for my kids. If the cereal had a big "G" on it, I knew it was good for me. Cheerios, Lucky Charms and Trix were the cheap convenient way for my mom to serve breakfast before I went to school. Wheaties was the "Breakfast of Champions" -- we knew that from the athletes featured on the front of the cereal box. Was there anything fresher and better for you than Green Giant vegetables, so you could get those good greens year 'round? You could buy them in cans or in the frozen-food section for quick serve. Pillsbury, bought later on, was synonymous with healthy cooking. General Mills allowed us to have foods that would have been too expensive in another time. Plus, the stuff lasted in your larder.

Think about it: My kids think these cereals are awful -- candy with no nutritional value. They regard cereal as expensive, and they are suspicious precisely because you don't have to throw it away after a certain date. They wonder what the heck is in it to make it last. Surely, nothing good for you.

To my daughters, buying vegetables under the Green Giant brand means buying something with the nutritional value sucked out as it's canned or frozen. They don't like anything from cans because of the preservatives and the loss of nutrition. Frozen, to them, means bad. And don't even get started on soups. Progresso, which to me was always the fresher version of soup, just represents another can of bad food to them.

Years ago, General Mills allowed me to have good food at a cheap price. Today, to my daughters, General Mills sells bad food that's expensive. That's why I look at General Mills and wonder about all the excuses for bad sales while Hain gives double-digit growth by understanding the new consumer. It's why I don't think of Kellogg (K) much better and why I prefer Annie's (BNNY) to Campbell Soup (CPB). It's why I wonder about ConAgra (CAG) and how good the growth can be as time goes on. It's the reason I fret about how Coca-Cola (KO) can reinvent itself when both diet and regular sodas are under attack by a public and a government that think these drinks cause real health problems. Unlike PepsiCo (PEP), Coca-Cola doesn't have much else to fall back on.

Any one of these names should bite the bullet and buy Hain, if only to raise their price-to-earnings multiples, even as there would be instant dilution to earnings. The old brands just don't resonate to a new generation of consumers or those who are just now beginning to buy stocks. I don't see how that can change.

I know that people are concerned that there's too much competition in the natural and organic space. I believe Whole Foods is going to pull away and that demand for its products is stronger than ever. I know that people like the consumer packaged-goods stocks because of their yields, but that won't protect them in a rising interest rate environment.

I say forget about them. Toss out the old and embrace the new. It's just going to be more obvious over time, especially as the generation that revered these companies as cheap purveyors of good food dies out and the millennials take over.

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