Ever since the attack, we have been stuck with a market that is willing to pay pretty much anything for companies that won’t get slowed by the inevitable recession, and pay nothing for those that will. Unfortunately, most people are in the stocks that do get slowed: media, retail, restaurant, aerospace, and, of course, telecommunications and technology.
I’m a big believer that there are always bull markets going on somewhere, however, and right now the only one is the bull market in basics, i.e. the staples, all those branded food companies we’d pretty much given up on during the roaring nineties. They are working today because sales are holding up despite the slowdown. No matter what happens, we don’t stop buying food and drugs.
So come with me to a trip through my local Kings supermarket in Short Hills, New Jersey, and I’ll show you where the biggest money can be made.
First, let’s skip most of Aisle One, the bread section, because Pepperidge Farm is owned by the morons at Campbell’s, and its competitor, Thomas’, is owned by Unilever, a giant company that is just too diversified to buy for its bread division alone. But wait, right at the end of the aisle is Hershey’s, a reinvigorated candy company that has taken a huge share of the candy shelves there. For years, privately held Mars had been taking it to Hershey, but now the Pennsylvania chocolate folks have scored a comeback, dumping non-core businesses and emphasizing nothing but confections. I want to own this one going into Halloween, the strongest season for a candymaker. Wrigley should be taking share here, too, but it’s too sleepy for my tastes. Nestle? Too big, too cumbersome, too slow. Skip it.
Aisle Two, cookies, used to be a virtual Verdun, the site of the bloodiest, most unforgiving price battles in the supermarket. Endless competition among truly mean-spirited oligopolists makes for shrinking margins and missed estimates. No more. Nabisco blinked and sold out to Kraft, which is putting on some fabulous numbers now that the war has ended. (The real loser, of course, is the consumer.) On Aisle Two, then, I love Kraft and its parent, Philip Morris.
Blow off the top of Aisle Three, sparkling water – nobody’s making enough money there, despite the mark-ups – and then move on down and feast on the sodas. Coke and Pepsi are now the only games in town, and they’re coining money – the other smaller brands have either been taken private or don’t have good ad support. Coke’s management, after taking a serious hit with the death of Roberto Gouizeta – the best exec in the industry – has finally developed a little bench strength. Pepsi’s better, though, and has that fantastic snacks business over in Aisle Four. I own it, and I buy it on any pullback. Pepsi just got Quaker Oats, too, which means those Pepsi trucks can also deliver cereal and Gatorade without much additional cost. What a brilliant merger that was. All of the other soda companies, victims of leveraged buyouts, have awful balance sheets; they just can’t compete with the majors anymore.
Four’s got cereal, and everybody’s doing well in that aisle – Kellogg, Pepsi, General Mills, and, once again, Kraft – because consolidation in this industry has allowed for price increases. It’s been a generation since Kellogg’s was a good buy, but now its historic move back above $30 after languishing in the twenties for what seemed like forever could mean that a run into the forties might be ahead. General Mills has its hands full with its recent purchase of Pillsbury, but once the kinks get worked out, costs will drop and margins should expand. The folks at Mills hold costs down better than any company in the food universe, so even the sluggish near-term fundamentals may not matter. If Kellogg’s goes back under $30, I’m going Battle Creek all the way and loading up my portfolio cart with the big K.
Aisle Five, soups, and Aisle Six, condiments, are proof that you can screw up a monopoly all by yourself. Campbell’s should own every bit of Five’s real estate, but it simply failed to expand correctly and now finds itself under siege from everyone. Heinz owns Aisle Six, so I want to own Heinz. There was a time when Campbell’s gave Heinz a run for the money with its Vlasic brand, but Campbell’s management spun Vlasic off, and it has self-immolated, giving Heinz free rein. Campbell’s downfall at a time when this industry is in ascendance is downright frightening. If it were a horse, someone would have shot it by now.
Seven’s pasta, gravies, and lots of other little products that are too unconcentrated to make anyone any money. But three big health-and-beauty companies dominate Aisle Eight: Colgate, Procter & Gamble, and Johnson & Johnson. P&G sacked its management a year ago, and the new folks really have their act together. That stock could be headed to the eighties from its mid-seventies perch. Colgate’s got traction, too, and I can’t believe this stock can stay in the fifties for long – too well run and too much weak-dollar momentum. (Colgate, like many of the branded companies, does tons of business overseas, and the suddenly weak dollar translates into higher earnings more quickly.) Johnson & Johnson’s been on fire because of its medical-device business; it’s a solid holding on any pullback. Don’t dip lower into Dial, though; in August, it jumped four points on takeover talk. Wait till it cools back below $15.
P&G also owns Aisle Nine, detergents. But Clorox is making some inroads. Give this one to Clorox, because of its other businesses, notably Kingsford Charcoal, Hidden Valley Ranch salad dressing, Glad bags, and Brita water filters. It is showing real growth for the first time in ages, and the stock’s headed higher.
So how long will this kind of research keep making you money? Eventually, the economy will show signs of life and these stocks will retreat. But right now you are looking at many more quarters in which economically sensitive stocks are going to report sour numbers, which will only make the consistency of these food plays all the more attractive. One day, when rates get to 2 percent, people will start buying more cyclical stocks again. But until then, leave the rest of the market to those who don’t mind taking a real economic beating, and man that shopping cart instead.
TheStreet.com
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James J. Cramer is co-founder of TheStreet.com. At the time of publication, he owned stock in Clorox, PepsiCo, and Philip Morris. He often buys and sells securities that are the subject of his columns and articles, both before and after they are published, and the positions that he takes may change at any time. E-mail: jjcletters@thestreet.com