Shrinkflation, angry shoppers and excessive meat sticks

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Investor interest in major food stocks is as low as it was when I was in the mid-1980s.

Note that I was about five years old at that time.

“From a generalist investor perspective, I would say it’s been pretty quiet [around packaged food names]. Your typical brand of institutional money has been quieter in space,” said Peter Galbo, the youthful, energetic packaged food analyst at Bank of America, on Yahoo Finance’s Opening Bid podcast (video above; listen below).

As Galbo explained it to me, investors are looking for faster-growing stocks ahead of a prolonged stretch of Fed rate cuts. Consider the desire to devour Nvidia (NVDA) stock on every dip, rather than eating General Mills (GIS) on a pullback.

You can easily see that in some of the data coming from Yahoo Finance.

Nvidia shares are up 168% year to date. General Mills is up just 10%. PepsiCo (PEP) and Conagra Brands (CAG) are both up about 2%. Hormel (HRL) is down 4%.

The S&P 500 (^GSPC) is up 21% this year, the Dow Jones Industrial Average (^DJI) is up 13% and the Nasdaq Composite (^IXIC) is up 20%.

But as I went through my in-depth conversation with Galbo (pun intended), I think there are a few other fundamental reasons that keep these companies out of investors’ shopping carts (pun also intended).

Your shopping list with explanation:

1. The companies are still too big in an investment world that no longer rewards the conglomerate model. Investors want focused strategies executed at the highest level. For example, should Conagra Brands sell frozen foods and also market Slim Jim and Duke meat snacks? Should spam maker Hormel have bought the nut company Planters from Kraft Heinz (KHC) a few years ago?

2. The companies want to become even bigger despite investors not rewarding the game! Conagra Brands just purchased the Fatty Meat Snacks line. The company has now cornered the meat snack market with Slim Jim, Duke’s and Fatty. Galbo tells me that meat snacks are a growth category in snacking. Fair, but I wonder why you need to own three meat snack brands!

3. The companies are slow to downsize their slower growing businesses. Just recently, General Mills sold its North American yogurt business for $2 billion. Campbell Soup is looking for a buyer for the Noosa yoghurt business it acquired with its Rao’s business. From Hormel’s latest earnings call, I didn’t understand that he is going to sell the Planters business, even though there are signs that the deal may not go as planned.

4. Consumers are angry at Big Food for its pricing strategies and are expressing their opinions by buying less. You saw that this week in PepsiCo’s volumes.

5. The cumulative effects of four years of inflation continue to put pressure on many households. Buying snacks is now a luxury.

6. Traffic at convenience stores has really slowed over the past year for economic reasons, but shopping has also shifted to club stores like Costco (COST). The local store channels need to do well for many food players to do well.

7. The Ozempic threat to the health of Big Food’s long-term profit power grows greater every day as new users of these drugs enter the market.

The story continues

Bonus Reason: The shares are not valued based on the reality mentioned above. They are still seen as defensive value strategies as the companies sell food.

That’s the wrong way to think about it, I think: It’s hard to defend Hormel trading at nearly 19 times forward earnings, which isn’t far off the S&P 500’s forward multiple of about 21 times. An old rule of thumb in investing is that a price-to-earnings ratio of 15 times is on the attractive side (I caution that this is not always the case and every company is unique, so don’t take my line as gospel).

Then there’s the raw commentary that, in my opinion, weighs on the industry’s multiples.

First, these companies have become political punching bags this election season. Vice President Kamala Harris has pledged to tackle Big Food’s price gouging if she wins the White House in November.

Senator Elizabeth Warren has been making the rounds about shrinkflation and calling out food companies for it.

All this rhetoric is not exactly encouraging investors to look for diamonds in the rough in the food sector.

There’s also what we’re hearing from consumer company executives that suggests a strong recovery in sales and profits in 2025 isn’t guaranteed.

“We see that [the] consumer is very challenged and that the consumer makes many decisions. They optimize their entire budget, so maybe they cut back on food to pay for their subscriptions, or maybe they cut back on food to go to movies on the weekend. Really, there’s a lot of tradeoffs they’re making when it comes to food.” PepsiCo Chairman and CEO Ramon Laguarta told me this past week, just after earnings took a nosedive.

The company lowered its full-year revenue outlook.

This is consistent with what Walmart (WMT) CEO Doug McMillon told me last week at the retailer’s headquarters in Bentonville, Ark.

‘People with lower income levels always have more challenges. They have to make trade-offs, and that, I think, has become more acute since this inflation cycle in the wake of the pandemic. So a household income under $100,000 feels pressure in a way that they might not have had a few years ago, and it shows in their behavior. And we’re trying to get prices down… some of the most persistent inflation is in convenience foods, dry groceries and consumer goods. categories, such as paper products and cleaning supplies,” McMillon said.

I wish Big Food the best of luck in regaining investor appetite. After all, these companies feed the planet. However, it will be difficult.

Three times a week I have insightful conversations with the biggest names in business and markets Opening bid. Find more episodes on our videohub. Check your favorite streaming service. Or listen and subscribe Apple podcasts, Spotifyor wherever you find your favorite podcasts.

Brian Sozzi is editor-in-chief of Yahoo Finance. Follow Sozzi on X @BrianSozzi and on LinkedIn. Tips about deals, mergers, activist situations or something else? Email brian.sozzi@yahoofinance.com.

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