When the market weakens, any industry that manages to keep its business relatively healthy deserves a closer look from investors. Although capacity utilization rates fell sharply late last year and early in 2009, some industry groups hit bottom last November, and they've held their lows ever since. That suggests they could lead the economy out of recession, producing strong stock returns along the way. Leading that particular pack: the food and beverage industry.
You gotta eat
This group is a part of the broader consumer staples sector, which was the best performer in 2008, losing only about 15%. Consumer staples in general, and food and beverage stocks in particular, are very defensive, and they're not as exposed to the ongoing consumer deleveraging that may represent a long-term trend. I've recently praised J.M. Smucker
Kraft is a long-term restructuring story. The company saw all of its business lines grow during 2008, at a time when most corporations faced serious revenue issues. Total 2008 sales grew almost 17%, including the acquisition of Group Danone's global biscuit business, and recent quarterly earnings show that last year's cost-cutting measures are now bearing fruit. Like Smuckers, Kraft benefits from consumer retrenchment -- but on a much larger scale. The shares yield more than 4% and trade at 14 times earnings. That's a sustainable dividend higher than the 10-year Treasury yield, at a time when such steady payouts are in high demand.
Buffett has another substantial stake in General Mills
Keep your wealth liquid
Buffett is also the largest shareholder of Coca-Cola
Coke seems to be turning around. There are still areas for improvement, of course; it has to catch up with PepsiCo
Trouble on the way?
Volatility in commodities prices could still take the wind out of food stocks' sails. Droughts in India, the largest consumer and second-largest producer of sugar, have dramatically increased prices for the sweet stuff. India will likely double its sugar imports this year, putting further pressure on the commodity's cost. That may be a bigger problem for concentrated businesses such as Hershey
Despite those potential threats, food and beverage stocks enjoy stable earnings and revenue and attractive valuations. They may not do as well if the market suddenly starts soaring, but they're unlikely to decline as much in a sell-off. In the end, you may find that trade-off perfectly delicious.
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