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COVID-19 pandemic sent food stocks skyrocketing, but here's why investors now fear them

Brian Sozzi
·4-min read

After being the can’t miss stocks of 2020 at the onset of the COVID-19 pandemic as consumers flocked to supermarkets to stock up on everything from peanut butter to frozen food, big food has found a far less receptive Wall Street in recent months amid fears of a growth slowdown.

Shares of some of the most well-known names in packaged food and beverages have lagged the S&P 500’s (^GSPC) record-setting run of the past three months, according to numbers crunched by Yahoo Finance. Several of the most prominent laggards over this stretch include Coca-Cola (-1.2%), McCormick (-3.2%), General Mills (-6.3%), Hormel (-7.2%), Kellogg (-7.5%) and Conagra Brands (-8.7%).

With the exception of Coca-Cola (-9% in 2020) and Kellogg (-10.8%), all of the aforementioned food stocks enjoyed solid — though unspectacular (relative to the 18% increase in the S&P 500) — gains in 2020 as sales and profits accelerated amidst the pandemic:

  • General Mills (GIS): +11.8%

  • McCormick (MKC): +11%

  • Conagra Brands (CAG): +8%

  • PepsiCo (PEP): +5%

  • Hormel (HRL): +3%

Hain Celestial (HAIN) has been among the outliers in both periods on optimism its new CEO Mark Schiller will continue to turnaround the all-natural goods maker — the stock rose 55% last year and is up 12% in the past three months. Shares of potato chip producer Utz (UTZ) have also been on fire, up a sizzling 33% from its late August market debut as executives have come out firing with strong results and a major acquisition.

But what gives with the largest names in food seeing weak stock prices? Why are these stocks — known for their stability — underperforming as it’s clear people continue to cook a lot of food at home with the pandemic still hampering mobility trends? The great fear on the Street, or so it seems, is that the entire sector is at risk of sales and profit margin declines later this year as COVID-19 vaccinations send people out back out into the wild after being cooped up inside for months.

Those ventures outdoors to bars and restaurants could lead to fewer meals at home just as big food is spending aggressively to invest in added manufacturing capacity. Not a potentially favorable dynamic to investors here.

“Investors continue to fear the potential margin reversal impacts next fiscal year, given promotional programs should return and mix headwinds are forthcoming from a foodservice rebound and an at-home [food] contraction,” Jefferies food analyst Rob Dickerson said in a note breaking down Conagra’s earnings a week ago.

Dickerson’s sentiment echoes that of many of his peers on the Street right now.

Upbeat outlooks

What’s bizarre, however, is that big food has done its part to quiet concerns on the Street about sharp growth slowdowns in the coming months. Conagra’s fiscal second quarter saw organic sales rise 8.1% and adjusted operating margins expand 250 basis points from a year ago. Strong by any measure, and especially so in the ultra-competitive packaged food space.

The company also reiterated full year guidance for its new fiscal year beginning in June.

CEO Sean Connolly then hopped on the earnings call and laid out strong reasons why consumers will continue to buy consumer packaged foods well beyond the worst of the pandemic. They ranged from millennials being keen on cooking to greater household formation post pandemic.

Meanwhile in late December, General Mills reported sales and profits rose 7% and 13%, respectively. Similar to Conagra, its outlook was upbeat.

“General Mills expects that the COVID-19 pandemic will drive continued elevated consumer demand for food at home, relative to pre-pandemic levels, through the remainder of fiscal 2021. Third-quarter demand trends are expected to be generally consistent with recent months, due to ongoing virus concerns in many markets around the world. Based on that assumption, the company expects to generate continued strong top- and bottom-line growth in the third quarter of fiscal 2021, with organic net sales growth roughly similar to the second quarter’s growth rate and an adjusted operating profit margin in line with the year-ago period,” General Mills outlined in a statement.

The latest batch of earnings and commentary from Conagra and General Mills suggest perhaps the Street is being too pessimistic with their outlooks. Some sector analysts argue demand for packaged food will stay elevated even as life returns to a degree of normality. The pandemic has molded new consumer behaviors that won’t be instantly unwound, experts argue.

“At-home food consumption will likely remain elevated versus levels seen before the pandemic due to consumer behaviors related to economic recession and work-from-home,” says Guggenheim Securities food and beverage analyst Lauren Grandet.

The next opportunity for big food to state its case will be at the widely followed CAGNY industry conference in February.

Brian Sozzi is an editor-at-large and anchor at Yahoo Finance. Follow Sozzi on Twitter @BrianSozzi and on LinkedIn.

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