Now may be the time to start building positions in food manufacturers, for several reasons.
First, the Fed has made it clear over the past month or so that it's itching to hike interest rates for the first time since last year. That steady message on the part of hawks and former doves inside the Fed is part of the reason the Dow has slumped during the last four weeks. I think the Fed will undertake a rate increase in June, and come out a little more hawkish than an already skittish market presently believes. In turn, that has a high probability of letting some air out of the short-term rebound we have seen in multiple key commodities for food producers, noticeably corn and sugar.
As that happens, it's very likely people will be on the hunt for food companies that stand to benefit from a dip in commodities prices. That search will come at another good time -- it's likely the market will see a summer swoon as a result of the Fed's tougher stance on policy and thin trading volumes, leading many investors to park cash in relative safe havens. Food companies -- which continue to slash costs and reinvent themselves -- will probably be the beneficiary of the inflow of scared capital.
To have any success investing in big food in an era of disruptive upstart organics companies being taken out at nosebleed valuations, I think a company has to fill several basic qualifications. They include:
1. Core products are being reinvented somehow, some way. Could be new product packaging. Could be a new take on a classic product. Whatever it is, it has to be something that at least catches the eye of a picky consumer down the aisles or in weekly supermarket circulars.
2. The company is reinventing around its core brand, either through launching new products in hot new areas (snacking, for example) or acquiring a new brand that is rocking their segment.
3. There has to be an ongoing cost-cutting plan in effect. Bonus points if the company has been proving it's finding more costs to cut than it previously articulated to Wall Street.
The name I see that fulfills these basic qualifiers is candy-maker Hershey (HSY). I was initially intrigued by the company a couple of months ago based on the cool new products that were popping up on shelves. But digging more into the results in the first quarter, it was impressive that the business seemed to hold up well during Easter amid the broad pullback in consumer spending. That gives me a degree of confidence that, barring a summer economic meltdown, the company could do quite well for Halloween and the holiday season -- a potential pullback in sugar costs would only sweeten the bull case here.
A couple of things that have caught my attention on the company:
Barkthins and Krave: Hershey recently acquired the "snacking chocolate" brand Barkthins. I have been trying these things out frequently in the past month, eating all the flavors and sharing them with friends. They are absurdly addicting and have a much better nutrition profile than a regular dark chocolate bar. I think this will be a big brand for Hershey -- the potential could already be seen (at least to me) with the sizable amount of premium shelf space the brand is getting at Target (TGT) and major supermarket retailers.
Barkthins joins another acquisition I am particularly upbeat on for Hershey in Krave beef jerky. Since the company acquired it in 2015, not a ton of new innovation has hit the market, likely because integration is paramount. But I suspect that will change in 2017. For now, Krave has some of the most innovative flavors in the premium beef jerky market, and the prime shelf space to continue doing well in the category. Not to mention that beef prices have fallen in recent months.
Barkthins + Krave = innovation around Hershey core chocolate franchise.
Core products being reinvented: I walked down the candy aisle on Sunday and came across new Reese's snack mix (peanut butter cups mixed with nuts in a high-margin 2-ounce package size). Nearby I saw Hershey's snack mix (mini-Hershey bars mixed with pretzel and almonds in resealable plastic containers). These products make ridiculous amounts of sense in this new snacking-crazed world. From an investment standpoint, it's good to see the creativity around a storied name such as Hershey and leaves one optimistic on further innovations in the not-to- distant future.
Cost-cutting continues: Like Pepsi (PEP), Coca-Cola (KO), General Mills (GIS), Kellogg (K) and other big-name food companies, Hershey is no slouch in wielding the ax to improve profit margins and the flow of new innovations. The company recently raised its annual savings target from its cost-cutting plan to $100 million per year through 2019 from $50 million to $70 million. (Target and Pepsi are part of TheStreet's Action Alerts PLUS portfolio.)