Week 152 - Food Processors in the S&P 500 Index

Situation: How many people think that they know a way to beat the S&P 500 Index? We keep saying that it can’t be done, not even over as few as two market cycles. If you are one of the ones who have made it a goal to beat the S&P, why not aim for the consolation prize? Namely, take Warren Buffett’s advice and invest in the lowest-cost S&P 500 Index fund from Vanguard (VFINX). The next best choice after this would be to invest in food processors. Yes, I know. We’ve said that before, too.

The S&P 500 Index has 19 such companies (see Table). Those companies typically outperform the S&P 500 Index but are also valued 10% higher than the Index (see Column J in the Table). That is acceptable because food prices have been growing more than 10% faster than inflation for a long time, and the gap is growing: Over the next two years, the US Department of Agriculture expects food prices to increase 3-4%/yr while overall inflation is increasing ~2%/yr.

Bottom Line: “Concentrated” stock portfolios are never a good idea, but food processing companies are the exception that proves the rule, right now and forever. How can that be? Well, food and water are the most essential goods (we'll talk about water next week). So, its no surprise that food processing companies continue to grow earnings even during a recession (see Column D in the Table). Go ahead and overweight those companies in your portfolio. What does “overweight” mean? Food processing companies are in the Consumer Staples industry, which has a 12% weighting in the S&P 500 Index. Be aware that "Consumer Staples" include companies that produce housewares, diapers, and personal care items (Procter & Gamble, Colgate-Palmolive, Clorox, and Kimberly-Clark) as well as superstores (Wal-Mart, Costco, and Target). So, we’re suggesting that you invest up to 10% of your stock portfolio in food processing companies. Start by researching those that are Dividend Achievers (see Week 122) with S&P credit ratings of “A-” or higher, then favor those with low volatility (Column I in the Table) and high Finance Value (Column E in the Table). As of this writing (5/6/14), Hormel Foods (HRL), McCormick (MKC), Coca-Cola (KO), and PepsiCo (PEP) meet those 4 criteria. 

Risk Rating: 3.

Full Disclosure: I dollar-average into KO, and also own shares of HRL, GIS, MKC, and PEP.

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