3 Food Stocks Flying Under The Radar

By Todd Shriber | July 29, 2009 AAA

When investors look to the food sector, they frequently flock to bigger names while glossing over some intriguing names among the mid caps in the space. Most investors know about stocks like Kraft (NYSE: KFT), which is a Dow member, and cereal giants General Mills (NYSE: GIS) and Kellogg (NYSE: K). Same goes for stocks like Heinz (NYSE: HNZ) and Campbell Soup (NYSE: CPB).

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We all know that food stocks aren't sexy. Viewed as one of the quintessential defensive sectors, food stocks don't pack the allure of technology, biotech or even financials. Food makers are usually pretty consistent earners that make familiar products and, more often than not, pay good dividends. The prevailing wisdom with food stocks is you know what you're going to get, at least for the most part.

There's nothing wrong with consistency and steadiness. Hey, if the past year or so has taught us anything, it's that a little boredom can be a good thing. That said, seeking the higher returns that mid cap stocks have been known to offer, particularly in a stodgy sector like food, can be a rewarding move for investors. So let's take a look at three food stocks that don't get a lot of attention, but may belong in your portfolio.



Company
Market Cap
P/E

Sysco (NYSE: SYY)
$13.3 billion
12.6

Cal-Maine Foods (Nasdaq: CALM)
$660 million
6.8

American Dairy (NYSE: ADY)
$480 million
16

You've Eaten Their Food Whether You Know It Or Not
Sysco is pretty big in terms of market cap at over $13 billion, but depending on one's definition, that can be in the midcap area. Regardless, Sysco is the largest supplier of food to fast-food and casual dining restaurants. Casual dining stocks such as Brinker (NYSE: EAT) and Darden (NYSE: DRI) were punished during the market downturn, but have rallied 60% and 20%, respectively, year to date. That makes Sysco's flat performance perplexing. (See Sinking Your Teeth Into Restaurant Stocks to learn more about investing in dining.)

Sysco holds 16% market share in a market that is short on other large players and that affords Sysco competitive advantages in terms of scale and pricing power. Sysco is a play on the consumer, and when the economy rebounds, leading more folks to tables at their local Chili's and Red Lobster, Sysco should benefit. In the meantime, Sysco is a low-risk proposition that features a 4.2% dividend yield.

An Egg-Cellent Proposition?
Cal-Maine is a stock you may not be familiar with, but it is the largest U.S. producer of eggs. Cal-Maine is vulnerable to egg prices, obviously, and corn and soybean prices, which are the primary ingredients in chicken feed. The stock has been relatively flat year-to-date compared to the returns of major indexes.

Cal-Maine reports its fiscal 2009 results at the end of July and those numbers are expected to fall significantly from fiscal 2008, but that hasn't kept some analysts from calling for the second-best year in Cal-Maine's history. One analyst even sees Cal-Maine rising to over $50 over the next five years, which would be a near double over recent levels.

While you wait, Cal-Maine offers a dividend yield of about 6%. Trading at around 5.2 times forward earnings with the aforementioned dividend means Cal-Maine could be a value investor's dream. Investors should note that the actual payout fluctuates as it is Cal-Maine's policy to distribute a third of its net income.

A Play On China's Newborns
Don't let the name fool you, American Dairy is the largest seller of baby formula in the world's largest country, China. With that enviable market position and the run-up in Chinese stocks this year, it's no wonder American Dairy ADRs are up nearly 80% year-to-date, far outperforming the S&P 500. That performance includes American Dairy's punk performance on July 13 when it shed 40% of its value after saying 2009 sales would miss analyst estimates. (Learn more about ADRs in our Tutorial on ADR Basics.)

American Dairy could be considered cheap at about six times forward earnings, but the company does have more current liabilities than current assets (as of the March quarter). Going forward, the fundamentals seem to favor American Dairy. Demand for dairy products isn't going anywhere and milk prices could start to rise next year. Plus its hard to ignore China's fast growing economy.

Bottom Line: Grab A Spot At The Table
For conservative investors, Sysco is the way to go. It has all the attributes food investors love and its market share is nothing to scoff at. For those on the hunt for a little more risk and perhaps more rapid returns, Cal-Maine and American Dairy are the way to go. To use just one more egg pun, Cal-Maine's prospects seem to be sunny side-up, not scrambled.

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