Investors find comfort in food

Wheaties, Wise potato chips, and Wrigley's chewing gum to the rescue?

Food has traditionally been one of the ultimate Wall Street havens, besides real estate and gold, for investors seeking out defensive investments.

During bear markets, consumer staples – widely known as "eat 'em, smoke 'em, and drink 'em" stocks – tend to hold up fairly well, according to Sam Stovall, who tracks stock sectors for Standard & Poor's Corp.

The "eat 'em" stocks do fall along with the general market. But they fall less than other sectors, such as large industrial firms, Mr. Stovall says.

That has again held true in this bear market. Many food-company stocks have fallen in recent months. But a number of food companies still look fairly promising, experts say.

The Dow Jones food index is up about 4 percent through July 29, even though the Dow Jones Industrial Average is down about 13 percent.

But before buying any food stock, consider this red flag: Food companies – including packaged-goods firms – have been a hot market play for the past two years, as battle-fatigued investors have played defense.

That turn to food has taken a lot of zest out of the sector, analysts say.

Moreover, most of the consolidation within the industry has already occurred, eliminating many opportunities for quick profits. Still, some mergers may still take place.

Attention, for example, is now focused on plans by Hershey Foods Corp. to let itself be sold. But the prospect of a sale or takeover has largely been factored into the company's current stock valuation, according to market experts.

Looking ahead, the food sector is generally seen as a so-so play.

"I'm feeling a little better" about future prospects for the food sector now that valuations have come down a little in the last month or so, along with the stock market in general," says John McMillin, a longtime food-company analyst with investment house Prudential Securities Inc., in New York.

Companies Mr. McMillin likes include such diversified firms as Archer Daniels Midland, Bunge, Dean Foods, General Mills, Heinz, Smuckers, and Tyson Foods.

"There are still gains to be made, but on a selective basis," McMillin says.

"Part of the difficulty in identifying future prospects is consumer sentiment, which has dropped during the past months," says a food analyst with an investment house in Virginia, who asked that her name not be given.

"If the economy only grows a little, and sentiment stays down a little, that should help the [food] sector. If the economy roars back and consumers start to put all their money back into growth stocks, that will obviously hurt the sector."

Currently, agricultural conditions around the US are helping shore up operating expenses within the industry, she says. Relatively benign market prices for soybeans, corn, and wheat, for example, should hold down processing costs, she says, although there is concern about the potential negative impact of the very hot weather in parts of the country. Meantime, energy costs are down – another plus for processors.

Firms she likes include Kraft, Performance Food Group, and Smithfield.

According to the US Department of Agriculture, planting acreage for major US field crops – sorghum, barley, oats, soybeans, wheat, cotton, and rice – is up slightly from last year. The increase is a potential aid to the processed-food sector, although many variables could affect the final crop output, experts say.

There are two main ways to invest in food stocks: 1) buying shares in individual companies which, given the sector's run up the past two years, may carry special risk; 2) buying food stocks through mutual funds that invest in the industry.

One fund that is completely in food: Fidelity Select Food Fund. Jim Lowell, who tracks Fidelity Funds through his "Fidelity Investor" newsletter, has had a "buy" recommendation on the fund. It is up more than 5 percent year-to-date, but has slipped the past few months, along with the broader market.

In addition, many diversified funds carry substantial positions in food stocks.

But be aware that such funds may carry companies involved with tobacco and alcohol – products some investors prefer to avoid.

Food-related funds can be identified through information firms, such as Morningstar, Lipper, and Value Line.

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