3 undervalued food stocks to be grateful for this holiday season

Key Points

• With cost pressures abating, a return to bottom line growth is expected for Conagra within the next few quarters.
• Kraft Heinz goes for 13x earnings while the average food product industry stock is at 22x.
• If profitability improves for J.M. Smucker as intended, value investors could be in for some sweet returns over the next few years.

Family. Friends. Health. 

There is certainly much to be thankful for this time of year. 

A recent Los Angeles Times column includes some unusual items. Rain. Electric cars. Christmas catalogs. Taylor Swift and Trace Kelce. 

We’ll add one more thing on the list — undervalued stocks.

With the S&P 500 index less than 300 points from setting a new all-time high, many equity valuations are as stretched as a waistband after Thanksgiving dinner. Look no further than some of the year’s biggest winners. Early artificial intelligence (AI) beneficiary Nvidia is trading at 121 times trailing earnings. Tesla’s price-to-earnings (P/E) ratio is 78x. Palo Alto Networks? 206x.  

Thankfully, not all stock valuations are stuffed. Approximately one out of every ten S&P 500 constituents are trading at less than 10x. 

With inflation subsiding and interest rates potentially soon to follow, 2024 could be a strong year for value stocks. As mega cap growth names soar to lofty valuations, the market could eventually embrace the more predictable, less volatile value style. 

If it does, some of the biggest bargains will be in the food aisle. Boring to some, food and beverage companies have long been one of the steadiest investments because their products are in constant demand. And with the market infatuated with AI and weight loss drugs in 2023, several food stock valuations have quietly been famished.  

At current prices, these three food manufacturers are well worth second helpings.

What is the valuation on Conagra stock? 

Conagra Brands, Inc. NYSE: CAG is trading around 12x trailing earnings and 10x next year’s earnings. The maker of Hunt’s, Healthy Choice, Reddi-Whip and other popular food brands has seen its share price drop 27% this year. Input cost inflation and other escalating costs have not been offset by higher sales volumes — and have taken a bite out of profits. 

There have, however, been some silver linings. Conagra’s snacks and frozen foods businesses have performed well in conjunction with consumer demand for quick, on-the-go nutrition. And with cost pressures abating, a return to bottom line growth is expected within the next few quarters. Plus, if grocery store inflation continues to subside, shoppers are likely to gravitate from private labels back to their preferred brands. This should lead to more balanced financial results at Conagra and restore investor confidence in the stock.   

Is Kraft Heinz stock undervalued?

Virtually every American loves Kraft Heinz Co. NASDAQ: KHC products — including Warren Buffett. The Oracle of Omaha’s Berkshire Hathaway owns approximately one-fourth of the company, and it’s easy to understand why. Kraft Heinz goes for 13x earnings while the average food product industry stock is at 22x. And with a dependable 4.7% dividend, the mac and cheese and Jell-O maker fits the mold of a value investment like, well, a lime Jell-O mold. 

After rising for three straight years, Kraft Heinz shares are down 16% year-to-date. Like most of its peers, it has raised prices to combat higher expenses — but at the expense of seeing consumers shift to generic competition. In an attempt to spur growth, the company is launching new products and buying others, such as it did by acquiring Assan Foods and Hemmer. Analysts are expecting these moves (along with lower costs) to result in modest profit growth next year — which should suit value investors just fine. Kraft Heinz still has challenges ahead, but at the current valuation and yield, will be gobbled up in due time. 

What is J.M. Smucker’s P/E ratio?

The J.M. Smucker Company NYSE: SJM has a P/E ratio of only 12x based on the last four quarters of earnings. The wildcard here is the company’s recently completed buyout of Hostess Brands, which has an unknown impact on future earnings. Skeptics aren’t convinced the pair will go together like peanut butter and jelly, nor that the $5.6 billion checkout price will be worth it. Given what Hostess brings to the table in terms of being on-trend with American on-the-go food consumption habits, accepting the uncertainty at this valuation is worth it.

The market has pushed J.M. Smucker shares down nearly 30% this year for the familiar cost inflation reasons and an extended struggle with supply chain issues. These will improve. As they do, the company will be operating within a more streamlined framework that excludes its divested pet food brands and includes a new Sweet Baked Snacks division encompassing the Hostess and Voortman brands. If profitability improves as intended, value investors could be in for some sweet returns over the next few years.