The bullish argument for food stocks — a seemingly obvious economic lesson in supply and demand — is as old as the market itself. People need to eat, and a booming population equals greater consumption.
Author and biologist Paul R. Ehrlich is best known for popularizing the extremist viewpoint of this argument through his book “The Population Bomb,” published in 1968. In it, Ehrlich argued that mass-scale famines would sweep across the world, indicting the industrial overuse of natural resources relative to population growth.
While his cheery outlook failed to materialize, the premise that the supply of food and agricultural products is too low to meet an increase in demand is still strongly touted by many financial analysts.
In theory, this is a bullish case for food stocks, which would benefit from forced demand. Many food stocks soared after the 2008 global economic crisis, while other industries required a push from accommodative policies set in place by the U.S. Federal Reserve.
This year, however, has been a mixed bag. Some food stocks continue to build off prior momentum, while others have sank dramatically. The upcoming earnings reports for the following three food stocks — Sprouts Farmers Market (SFM), Hershey (HSY) and WhiteWave Foods (WWAV) — will separate the contenders from the pretenders.
Food Stock to Watch: Sprouts Farmers Market (SFM)
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Despite bullish developments such as business expansion into high-traffic metropolitan areas and rumors of a potential buyout by Whole Foods (WFM), the markets have failed to see the same picture. Year-to-date, SFM stock is down nearly 30%, and it’s essentially been a straight negative trend since Sprouts’ initial public offering.
Will SFM stock’s earnings report for the second quarter of fiscal year 2015 provide some much needed joy? Sprout’s earnings history has been mostly solid. Despite missing its Q1 FY2015 net income target, SFM stock has exceeded Wall Street expectations over the prior six releases, mostly by a wide margin.
Buoying the case for Sprouts Farmers Market is its steady increase in top-line sales, along with its well-managed cost control associated with the revenue increase.
The problem, however, is that the positives in the fundamentals have rarely been reflected in the markets. Typically, panicked traders engender chaos, making SFM stock unsuitable for conservative investors. Shares of Sprouts, though, have managed to stay steady though for the past two weeks, and if SFM stock can pull a convincing earnings surprise, this may turn out to be a shrewd buying opportunity.
Food Stock to Watch: Hershey (HSY)
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Not only is HSY stock down 10% YTD, Hershey shares have more or less traded flat since August 2013. Pouring salt on its wound, Wells Fargo Securities recently downgraded HSY stock, citing the economic instability in China as weighing on Hershey’s global sales.
Can the company’s earnings report on Friday change Hershey’s fortune?
Unfortunately for management, branding alone cannot bolster Hershey’s financial performance. Over the past four earnings reports, HSY stock has only met or exceeded Wall Street expectations once, in Q2 FY2014.
International pressure may be a little much for Hershey to overcome in Q2 of this year, as its revenue is showing small signs of a slowdown. In addition, investors may be worried about stability in the balance sheet, where total liabilities have been outpacing total assets over the past four quarters.
HSY stock holders will be eager to get this once hot-running company moving again, but the consolidation pattern in the markets over the past four months is cause for concern. Given that a year earlier, Hershey rallied roughly 26% following a steep selloff in July, the current sideways action following a similar drop in April of this year is not what bullish investors are looking for.
Although there are certainly positives of being an industry titan, HSY stock has both fundamental and technical questions that make an investment at this time a bit of a risky proposition.
Food Stock to Watch: WhiteWave Foods (WWAV)
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The only source of criticism from a technical perspective is that much of the YTD gains have been made in the first quarter. Since the beginning of April, WWAV stock has moved up “only” 17%.
Is the ride slowly coming to an end or can the bulls depend on another leg up?
When it comes to financial performance, WhiteWave is the toast of Wall Street. Since its third-quarter earnings report in fiscal 2012, 11 consecutive earnings reports have either met or exceeded the consensus forecast. Given this rousing regularity, it would take a brave person to bet against the trend.
There are serious flaws with WhiteWave, however, centering around its balance sheet. In particular, shareholder equity is swallowed up by rising debt levels exceeding $1.5 billion. Additionally, the company is very cash-poor, which would hinder its ability in long-term investments.
Some of these concerns may be creeping into the markets. There’s no question that WWAV stock has trimmed its momentum in the past 90 days, and although it’s still a surging investment, long-term shareholders may be looking for an excuse to dump out. Particularly if WWAV stock provides a ho-hum earnings result for Q2 FY2015, it may be difficult for the long hands to not take profits off the table.
As of this writing, Josh Enomoto did not hold a position in any of the aforementioned securities.
