A Taste for Food StocksAs investment managers continue to shake up their portfolios and dump losers to stop the bleeding, the market has sunk lower. Severe meltdowns are usually followed by bursts of opportunistic buying, but so far those have been fleeting. Nonetheless, recent moves by some big investors indicate some pros are starting to nibble.
"Today's prices offer the opportunity of a lifetime," says Edwin Walczak, chief investment officer for U.S. equities at Vontobel Asset Management in New York. Given the market's free fall, the "array of possible buy candidates has increased, and we have been upgrading our portfolio," he adds.
Jeffrey Kleintop, chief market strategist at LPL Financial, says: "Investors have priced in a scenario even worse than the Great Depression." The market is oversold on a technical basis, he thinks, and could bounce sharply. "We believe we are nearing an opportunity to increase exposure to stocks rather than going entirely to cash," he says. What could trigger an upturn? "There are policy actions and stimulus in the pipeline that should soon begin to have a measurable impact," notes Kleintop. The nonpartisan Congressional Budget Office has forecast that the $800 billion fiscal stimulus package will add 4% to gross domestic product in the third and fourth quarters this year, he points out.
Vontobel's Walczak, whose portfolio took a beating in 2008 but still outscored the S&P 500-stock index, used its cash to add Kellogg (K), Mead Johnson Nutrition (MJN), and Kraft Foods (KFT) to the company's portfolio. Early this year he had sold his big stakes in General Electric (GE) and American Express (AXP).
Walczak thinks Kellogg, a major provider of cereals and fruit snacks, is worth 55 a share. Down to 38.57 from 58 in September, he figures it's now attractively priced. Jon Anderson of investment firm William Blair says Kellogg is an "established growth" stock and rates it outperform. He sees it earning $3.04 a share in 2009 and $3.35 in 2010.
Mead Johnson, spun off by Bristol-Myers Squibb (BMY) last year, went public on Feb. 10, 2009, at 24. It has since edged up to 26.64. A maker of food products for infants (Enfamil is its top brand), Mead posted revenues of $2.9 billion in 2008. No analyst covers Mead just yet, but Walczak believes it is a long-term growth story. His 12-month stock price target for Mead is 40.
Kraft, a food and beverage leader, fell to 21.31 from 34 in September. With a dividend yield of 5.3%, the stock is cheap, says Walczak, who values it at 30. Its defensive, or lower-risk, profile makes it attractive in the current environment, he notes.
Unless otherwise noted, neither the sources cited in Inside Wall Street nor their firms hold positions in the stocks under discussion. Similarly, they have no investment banking or other financial relationships with them.Is DaVita Ready to Revive?In times of economic weakness, recession-resistant stocks are supposed to be safe havens. But it ain't necessarily so. One such outfit is Big Board-listed DaVita (DVA), the second-largest U.S. provider of dialysis services for chronic kidney failure. Shares fell to 43.40 from 58 in September, although earnings are on the rise. The company's balance sheet is robust, generating yearly cash flow of $400 million, or $4 a share, notes Andreas Dirnagl, managing director at investment bank Stephens, who rates DaVita outperform, with a 12-month target of 67. Worries that the recession will trim profits and revenues are groundless, says Dirnagl. He sees earnings of $3.81 in 2009 and $4.24 in 2010.
Justin Lake of UBS says DaVita is a core health-care holding, given key defensive factors, such as its life- sustaining care services and robust cash-generation capability.
Unless otherwise noted, neither the sources cited in Inside Wall Street nor their firms hold positions in the stocks under discussion. Similarly, they have no investment banking or other financial relationships with them.
Marcial writes the Inside Wall Street column for BusinessWeek. In 2008, FT Press published the book Gene Marcial's 7 Commandments of Stock Investing.