ConAgra headquarters. Source: Company website

It has not been a very good year for ConAgra Foods(NYSE:CAG), but you wouldn't know it looking at the stock performance. Shares of the packaged food giant are up nearly 50% for the past year, far outpacing the S&P 500, which has returned just 15% over the same period.

These huge gains for ConAgra came despite some fundemental problems in its business. The company continues to see sales decline across some core brands, and it is grappling with a bloated balance sheet after taking on a sizable amount of debt to finance its purchase of Ralcorp Holdings, a deal that has not worked out well so far.

But investors don't seem to mind, as word of a significant investment by an activist investor recently caused ConAgra stock to spike 10%, hitting an all-time high.

Here is why the euphoria is misguided.

Investors are hoping for a shake-up
On Friday June 19th, it was revealed in a 13-D filing with the SEC that hedge fund Jana Partners took a 7% stake in ConAgra. Jana then stated its belief that shares of ConAgra are undervalued. The financial media has reported that Jana, a well-known activist investor firm, is likely to pursue three board seats at the company.

Typically, activist investors go after companies they believe hold hidden value that can be unlocked with a major move, such as a merger or spin off. In this case, it is possible Jana sees the company as being vulnerable to change after its merger with private-label food manufacturer Ralcorp Holdings in 2013.

This acquisition has not worked out as management had hoped: ConAgra purchased RalCorp Holdings for $5 billion to boost its private-label brands, but significantly higher-than-expected integration costs resulted in huge impairment charges taken against earnings. In the last fiscal year, impairment charges totaled $681 million. Just last quarter, ConAgra wrote down $1.3 billion of goodwill in its private label business.

In a predictable, follow-the-herd mentality, several Wall Street firms upgraded their price targets for ConAgra in the wake of the Jana news. Credit Suisse raised its price target for the stock to $42 from $34 per share, then JP Morgan upgraded ConAgra as well, raising its own price target to $52 from $39 per share. This kind of Wall Street reaction is all too familiar, as analysts often have to scramble to raise their price targets when a stock price jumps beyond their initial expectations.

But all of this is missing the core problem: ConAgra's fundamentals remain weak.

Core brands are in decline
Aside from the headaches presented by the Ralcorp acquisition, ConAgra's product portfolio is stagnating. In fiscal 2014, sales in the consumer foods unit fell 3%, driven largely by weakness in its Healthy Choice, Chef Boyardee, and Orville Redenbacher's brands. They collectively account for more than $1 billion in annual sales and comprise a significant portion of ConAgra's consumer foods segment, the most important one for the company since it makes up 47% of total revenue. 

Consumer foods sales also declined 1.6% through the first three quarters of the current fiscal year. It seems that the trend away from packaged, canned, and frozen foods toward fresher, healthier alternatives like organics is hitting ConAgra particularly hard. This was the impetus for the private-label acquisition, but that has not succeeded -- private-label sales fell 5% last quarter due to a 7% drop in volume, and even excluding the $1.3 billion in impairments, adjusted operating profit collapsed 44% due to higher commodity costs and what ConAgra refers to as "execution challenges."

Strategic alternatives leave a lot to be desired
Strategically, there does not appear to be many options for Jana to shake-up ConAgra and turn the quick profit activist investors usually desire. Jana may push for ConAgra to spin off its private-label business, but because that segment is rapidly deteriorating, the company is unlikely to receive an attractive offer. Another possibility is to pressure the company to take on debt to buy back its own stock. But again, this poses challenges: ConAgra already has a bloated balance sheet. At the end of last quarter, ConAgra held $6.7 billion in long-term debt and just $4.5 billion in stockholder equity.

Until these core operating problems are resolved, the stock rally seems like smoke and mirrors. If anything, it might allow investors to get out while they can, before the allure of the Jana investment fades, and the market realizes that ConAgra still has very significant challenges to overcome.