Top 3 Best Food Stocks to Buy Now? (2019 Review)
This article examines the best food stocks in the stock market.
Food stocks used to be a cornerstone of every conservative portfolio. That’s because food stocks provided reliable and recurring revenue, which often translated into decent capital appreciation and a regular dividend.
The problem is that food stocks are no longer the slam-dunk holding that they used to be.
That’s because of several factors that have entered the market. For starters, there is a lot more competition in the food stock space and there used to be.
Another issue is that people’s consumption habits have changed, not just domestically, but all around the world. People have increasingly been selecting “healthy” foods, and dumping old favorites like snacks and cereals.
The bad news for legacy food stocks is that growth is not only slowed, but has translated into outright revenue declines. The good news is that a number of new food stocks are taking the lead, while other legacy players have figured out how to adapt to the market, primarily because they already specialize in certain areas.
The Best Food Stocks For 2019
If you’re in a hurry, below are our picks for the most valuable food stocks as of this writing.
- Nomad Foods: Rapidly increasing market share in Europe with a known brand.
- United Natural Foods: It’s good to be a wholesaler when retailers are fighting it out.
- McCormick and Co.: A dividend winner whose specialty products stand the test of time.
Keep reading and you’ll learn more about each of these winning food stocks and my thoughts on each.
What Are Food Stocks?
Food stocks are part of a category that are generally considered “consumer staples“. What that means is that, no matter where you live, you will need to eat food. Therefore, food becomes a staple to our everyday existence.
For decades, the best food stocks enjoyed stable and regular growth. They were often considered what legendary investor Peter Lynch called “stalwarts” — Stocks that investors could absolutely rely on for the long-term.
These stocks may not have blockbuster growth, but they did enjoy 6% to 9% annual earnings growth for many many years. As a result of this consistent growth, all of these food stocks would generate reliable and consistent cash flow.
That cash flow would be partially reinvested into the company, but they would very often be returned to shareholders in the form of a dividend.
About 15 years ago, things started to change. As companies like Whole Foods Market began to appear, people began thinking about food and food stocks in a new way. One didn’t simply have to shop at the standard grocery store anymore. There were alternatives, which also included things like farmers markets.
Soon, innovators and disruptors entered the space, and took a hold of the message that certain foods were less healthy to eat than others. They effectively help to create a new market.
Now, there are a number of new food stocks that are taking market share away from the legacy providers. These have become the top food stocks because there growth is significantly outpacing their older competitors.
Read Also: What’re the best dividend stocks?
How Do You Determine What Qualifies As The Best Food Stocks?
The best performing food stocks usually have at least one of the following characteristics:
- Increasing revenue
- Increasing dividend
- Penetrating new markets
Many of the legacy food stocks are no longer seeing any revenue growth. In fact, they are seeing revenue declines as they lose more and more market share to new competitors.
Therefore, if you see food stocks that are enjoying year-over-year revenue increases of 5% or more, those are food stocks you should pay attention to. It means that consumers are starting to take notice of their product, and are dumping some of their old favorites to try new things.
There are very few sectors where seeing an increase in annual revenue is the exception as opposed to the rule. That exception means a stock should be investigated further.
Not all of the legacy food stocks are in trouble. One of the challenges of being a large provider of diversified food products is that a company must manufacture a lot of product on a regular basis.
However, legacy food stocks that specialize in limited types of food products will have an advantage. They don’t need to be all things to all people. They can focus on a specific niche, and become a leading brand name in that market.
Consequently, they will still see some revenue growth. It may not be the kind of revenue growth that some of the upstarts are seeing, but slow and steady will continue to win the race for these food stocks.
As revenue increases, and a company produces more efficiencies in its business, it usually translates to an increase in dividend payments.
If you can find food stocks that are increasing their dividends when their competitors are contracting, those are food stocks worth investigating further.
Penetrating new markets
The world is a very big place. While it may seem that even the most remote countries
have famous products like Coca-Cola, and therefore they would have familiar brands in their stores as well, you’ll be surprised to discover that many Western markets still have not been penetrated by legacy brands.
That leaves plenty of market share to be grabbed by innovators and upstarts. Thus, if you find food stocks that are jumping into new markets and doing so effectively, you may be onto food stocks worth investing in.
Here’s a video that gives additional information on investing in food stocks.
Nomad Foods Limited
What is it?
Nomad Foods is a British company, a true disruptor that specializes in frozen foods. By jumping into the European market, Nomad has become a recognizable brand.
What makes it a good stock?
The company has figured out the flaws in how Europeans purchase and eat frozen foods, and fixed those issues. Like all great companies, Nomad saw a problem and solved it. As a result, its revenue and earnings are exploding and it is fast becoming the “go-to” frozen food choice in Europe.
Revenue has more than doubled since 2015’s $894 million to $2.05 billion in the trailing twelve months. After losing almost $500 million in 2015, net income jumped to $36 million in 2016, $136.5 million in 2017, and $158 million in the trailing twelve months.
It has also generated $155 million in free cash flow over the same period.
Analysts project 5-year annualized net income growth of 15%. With the company trading at 23 times trailing twelve months earnings, and 14 times next year’s earnings, Nomad Foods is both growing nicely and cheap.
United Natural Foods
What is it?
United Natural Foods is yet another one of these specialty operations that has been giving the legacy food stocks a very hard time. Rather than deal in the same old staples that consumers are bored of, it stays away from retail entirely.
Instead, United Natural Foods sticks to the wholesale and distribution business. It further refines those niches by sticking to natural, organic, and specialty foods.
What makes it a good stock?
Remember that I mentioned that revenue growth was an important metric? United Natural Foods is enjoying annualized revenue growth of 12% over the past five years.
Costs have been a bit erratic, though, so net income has not been consistent. It is, however, making plenty of money. $126 million in profiti n 2015, rose to $165.7 million in the trailing twelve months.
There is free cash flow at United Foods and it has been paying down debt. As it continues to expand its business, I expect both profit and stock price will improve.
McCormick and Co.
What is it?
Rounding out our list of best food stocks is McCormick and Co. You very likely know McCormick’s products if you ever go to a grocery store. They are the famous provider of spices and flavorings. Here is where a long-lasting brand name has not only created trust, but has allowed McCormick to undercut competition on pricing.
What makes it a good stock?
Revenue has increased by about 3.8% on average over the last five years. While that number will impress only the most conservative investors, it shows a marked improvement over many food stocks.
McCormick is truly as reliable as they come, as far as revenue and profit. Revenues continue to rise very modestly – about 3% – 4% per year. Net income has been very stable, running between $400 million and $500 million each year.
As a result, McCormick has been able to generate reliable free cash flow, and from that, an ever-increasing dividend. In fact, McCormick is known as a “dividend aristocrat”. It is part of a select group of stocks that have increased their dividends every year for at least 25 years in a row.
This year is the 32nd year the company has increased its dividend, which now stands at $2.08 per share.