Not bad at all. After last week’s upside explosion, stocks were entitled to a little R&R. So far, however (Monday and Tuesday), the market has given us only a shallow pullback. It still looks as if the major equity indexes are setting up for a nice December rally.
I want to exploit the bounce, too. As you know from previous commentary here, though, I’m also wary of what may follow in 2013 if our leaders in Washington muff the chance to avert the “cliff” and to set the nation on the path to real fiscal reform.
How do we resolve this dilemma?
Today’s news contains a clue. Food processor ConAgra (NYSE:CAG), one of our Growth & Income Plays, announced a friendly $6.8 billion pact to take over Ralcorp (NYSE:RAH).
This is CAG’s second attempt to hitch up with RAH. The first offer, a hostile bid launched in March 2011, failed after Ralcorp’s board deemed the price inadequate. CAG walked away rather than raise the ante.
I’m actually happier with the second transaction. For starters, it’s a deal agreed upon by both parties. Integrating the two organizations will be easier with Ralcorp management on board.
Equally or perhaps even more important, Ralcorp has become a more focused enterprise since the ConAgra’s first bid collapsed. In February 2013, RAH plans to spin off its slow-growing Post cereal business in order to concentrate on private-label foods (store brands).
Private label is growing quite a bit faster than the overall food market—a trend I expect to continue for years as budget-pinched consumers look for ways to stretch their grocery dollar. With the Ralcorp merger, ConAgra will vault to the top as America’s largest producer of private-label foods.
Investors apparently grasped the growth implications of the deal today: Not only did Ralcorp’s stock skyrocket, but ConAgra shares also climbed to a fresh 52-week high. In this era of lackluster economic growth, food processing is a good business to be in—especially for companies with forward-looking, efficiency-minded managements.
Hold CAG if you own it.
Meanwhile, I’ve got another food stock for you that fulfills our desire to play offense and defense at the same time. Mondelez (NASDAQ:MDLZ) is the surviving company after Kraft (NASDAQ:KRFT) spun off its slow-growing North American grocery business October 1.
A leader in the global snacks industry, Mondelez (pronounced Mon-da-LEEZ) owns such powerhouse brands as Cadbury, Chips Ahoy, Oreo, Toblerone and Trident. MDLZ also maintains a smaller but still significant foothold in beverages (Gevalia, Tang) and cheese/grocery (Dairylea, Philadelphia).
What’s the growth story? MDLZ generates about 44% of its sales from emerging markets, where food consumption — and especially snacks consumption — is rising more rapidly than in developed markets.
Europe was a drag on Mondelez’ Q3 results, and both Brazil and Russia showed some temporary softness due to inventory and pricing issues. As a result, the stock has languished in recent weeks.
That will change, though, as investors form a clearer picture of Mondelez’ long-term growth outlook. Over the next 12 months, I figure the stock could appreciate 15%-20%, putting it at a price-earnings ratio similar to that of Nestle (PINK:NSRGY), the other premier global food franchise. In addition, MDLZ throws off a respectable 2% dividend yield, with plenty of room for increases in the years ahead.
In tandem with the Mondelez purchase, we’re selling food distributor Sysco (NYSE:SYY). SYY’s growth rate has slowed sharply in the past few years, and I don’t see much evidence of acceleration on the horizon. SYY has generated a 31% total return for us since January 2008, double the gain of the S&P 500 index over the same period.
