Packaged Food Stocks: Year in Review

TheStreet.com

NEW YORK (TheStreet) -- Everything is relative in the stock market. But with only 17% year-to-date gains, it's hard to get excited about the this year's performance of the packaged foods industry when it lags the 25% jump of the S&P 500 . For that matter it also lags the performance of food distribution companies. However, that's not to say investors haven't done well. That is, of course, if they knew not only what to buy, but when.

Leading the way with 80% year-to-date gains is Green Mountain Coffee Roasters , which added a much needed jolt to an industry that has been marred by weak volumes and slumping prices. But I have to admit, this is one performance that I didn't see coming, even after Green Mountain posted 8% decline for all of 2012.

Green Mountain's business practices (specifically its accounting, which has faced SEC scrutiny) have always kept me at bay. Not to mention, hedge-fund manager David Einhorn has a sizable short position on the company. Einhorn is not known to be wrong very often.

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Nevertheless, those who placed their bets on this company are sitting pretty, if a little jittery. Because I couldn't rest easy heading into 2014 with 80% gains on the table and believing that things can get better. The odds are that they won't. For now, Green Mountain's much maligned management deserves plenty of credit for having regained the Street's trust.

Along those lines, I would worry about Diamond Foods , which, despite its own history of SEC inquiries, has enjoyed year-to-date stock price gains of 90%. The company's alleged infractions, which include payments to walnut farmers, were not as costly as those of Green Mountain. In fact, given that the company is in a much better shape today than it were last year, as with ConAgra Foods , I expect Diamond shares to continue their climb in 2014.

ConAgra is interesting for a multitude of reasons. Now, I've heard disappointment about the company's 11% gains. But we have to keep this performance in the context of where this company has been. ConAgra has never really been a consistent outperformer. And this year was no different. Management is still working to synergize the value they envisioned from the Ralcorp acquisition.

I grant that the process has been slower than investors would like. But as I've said recently, this is still a brand with strong nutritional value. I place ConAgra at the top of my list of food outperformers in 2014. By contrast, with its year-to-date gains of 44% and 33%, respectively, I still rank both Hormel Foods and Annie's as too expensive for my taste.

Given their valuations relative to Campbell Soup and Mondelez , the Street is placing some high bets on these companies, especially where the margin leverage and profits do not justify the optimism.

I don't deny that Annie's management has done exactly what the Street has demanded, which is to grow the top line. But I can't overlook that the company is relatively young with limited history of execution. In that regard, I believe Hain Celestial , which traded at half of Annie's forward P/E, is the better buy for 2014, especially since you can get 7% more in quarterly revenue growth.

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All told, there isn't a perfect formula to timing the entry and exit points in these stocks. But I have noticed over the years that depressed companies or those that have fallen out of favor with the Street can easily rebound, as both Green Mountain and Diamond Foods have shown. But that's not always a guarantee.

On the flipside, there are companies like Kraft's 20% gains, which I love, and Kellogg , with gains of just 11%, that can never regain their sex appeal. But their strong dividends and safety quality makes them hard stocks to pass up, regardless of economic environment. Suffice it to say, 2014 will present a nice buffet of food options to choose from. Just be sure to weigh them properly.

At the time of publication, the author held no position in any of the stocks mentioned.

This article was written by an independent contributor, separate from TheStreet's regular news coverage.

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