The new reality for big food stocks: Shrinkflation, upset shoppers, and excessive meat sticks

3 days ago

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The investor appetite for big food stocks is as thin as I was back in the mid-1980s.

Note in that time period I was about five years old.

"From a generalist investor standpoint, I would say it has been pretty quiet [around packaged food names]. Your typical kind of institutional money has been quieter in the space," youthful, energetic packaged food analyst at Bank of America Peter Galbo said on Yahoo Finance's Opening Bid podcast (video above; listen below).

The way Galbo explained it to me, investors are in search of faster-growth stocks ahead of a prolonged stretch of Fed rate cuts. Think of the desire to devour Nvidia (NVDA) shares on any dip, as opposed to eating up General Mills (GIS) on a pullback.

You can easily see that in some Yahoo Finance-sourced data.

Nvidia's stock is up a sizzling 168% year to date. General Mills is only up 10%. PepsiCo (PEP) and Conagra Brands (CAG) are both up roughly 2%. Hormel (HRL) is down 4%.

The S&P 500 (^GSPC) is up 21% this year, the Dow Jones Industrial Average (^DJI) 13%, and the Nasdaq Composite (^IXIC) 20%.

But as I digested (pun intended) my in-depth chat with Galbo, I think there are a few other fundamental reasons that are keeping these companies out of investor shopping baskets (pun also intended).

Your shopping list of explanations:

The companies are still too big inside an investing world that's no longer rewarding the conglomerate model. Investors want focused strategies executing at the highest level. For instance, does Conagra Brands need to be selling frozen food and also hawking Slim Jim and Duke's meat snacks? Should Spam maker Hormel have purchased the Planters nut business from Kraft Heinz (KHC) a few years ago?
The companies want to get even bigger despite investors not rewarding the play! Conagra Brands just purchased the Fatty meat snacks line. The company now has the meat snacks market cornered with Slim Jim, Duke's, and Fatty. Galbo tells me meat snacks are a growth category in snacking. Fair, but I question why one must own three meat snack brands!
The companies are slow to slim down their slower-growth businesses. Only recently did General Mills sell off its North American yogurt business for $2 billion. Campbell Soup is hunting for a buyer for the Noosa yogurt business it got with its Rao's business. I didn't get the sense from Hormel's latest earnings call it's going to sell the Planters business amid signs the deal may not be working out as planned.
Consumers are pissed off at Big Food for its pricing strategies and are voicing their views by purchasing less. You saw that in PepsiCo's volumes this week.
The cumulative effects of four years of inflation continue to pressure so many households. Buying snacks is now a luxury.
Traffic at convenience store stores has really trailed off the past year for economic reasons, but shopping has also shifted to club stores such as Costco (COST). Convenience store channels need to be doing well for a lot of food players to do well.
The Ozempic threat on the long-term health of Big Food earnings power is rising every single day as new users of these drugs enter the market.