Investing in food may always seem like a win-win scenario. People must eat no matter what, and as populations grow, so must the food supply. Those are excellent reasons to invest in food-related stocks, but they are no guarantee that ALL food-related stocks will benefit. Consider Kroger (NYSE: KR), one of the largest supermarket chains in the country. At the beginning of 2009, many analysts would have suggested this stock. It's a grocery store, and recession-hit consumers were embracing the savings of eating in versus dining. Thus went the reasoning that grocers will do well in this environment. Now, early in 2010, Kroger shares are down over 20%, significantly underperforming the market. (For related reading, check out Evaluating Grocery Store Stocks.)

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The Retailing Curse
What was forgotten about grocery stores is that they are in effect retailers and are vulnerable to the retailing curse: lots of competition and a wide array of substitutes. So, the result was lots of price competition, which ate into profits. Other grocers like Supervalu (NYSE: SVU) and Safeway (NYSE: SWY) also experienced share price declines in 2009. Costco (Nasdaq: COST), which runs a members-only chain of supermarkets, a slightly different model than traditional grocers, ended the year up nearly 10%.

But fundamental factors still remain regarding food, and while I have alluded to the favorable outlook for agriculture-related plays in other articles, some food production companies do indeed look appealing in 2010.

Up The Supply Chain
Moving up the supply chain, investors will find a favorable industry environment. Instead of competing with hundreds of other grocery store chains, the food producers themselves only deal with dozens of competitors. While that is still a competitive environment, it's much easier to identify the standout selections. One such name is Kraft Foods (NYSE: KFT), the second-largest food company in the world. Kraft shares were virtually flat for the year in 2009, but take that as an opportunity to still have a chance at this undervalued business. Kraft's products are found all over the world, but most importantly, they are considered staple items in many households. Trading for less than 13 times 2010 earnings, it remains a great buy in 2010. As a bonus, the shares currently yield over 4 percent.

The company's shares have been held back by its attempt to buy candy company Cadbury (NYSE: CBY). Time will tell if Kraft gets that deal. Kraft doesn't seem willing to overpay for Cadbury, so getting it makes the company an even more attractive proposition.

While not as appealing on a valuation basis as Kraft, General Mills (NYSE: GIS) and Procter & Gamble (NYSE: PG) are two giants that performed well in 2009, but you wouldn't know by the share price. Both are trading at lower multiples than the S&P 500 and could be excellent picks in 2010, especially if the market rally cools off.

Think Businesslike
Value-investing legend Ben Graham once remarked, "Investment is most prudent when it is most businesslike." Moving up the supply chain and focusing on food production, versus food sales, today appears to be the most valuable part of the supply chain.

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Tickers in this Article: KFT, KR, COST, SVU, SWY, PG, GIS, CBY

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