For social investors, the food sector has stood out for the last decades as quite a palatable performer. Happily, it has also agreed with the fiscally conservative taste of many SRI investors—most segments of the industry are non-cyclical and defensive.
At Clean Yield, we choose investments in food stocks à la carte, but first we break the sector into four roughly defined segments: commodities, processing, distribution and retail, and restaurants.
Commodities are at the bottom of the food chain. Unlike the three other segments, commodities are risky because they are subject to short-term weather events, climate change, speculators, trade sanctions, and production time limits.
The stock choices for SRI investors in the commodity area are limited. Most companies do not pass CY social screens — think Tyson or Smithfield — and the financial risk that attends these companies is too high. Instead, this is an area where we use private investments to gain exposure, if they are available. For dairy, we use Organic Valley; for coffee, Equal Exchange; for meat, Vermont Smoke and Cure; for seeds, High Mowing Organic Seeds. In general, these investments are deliberately structured to enhance the sustainability of the companies, not the financial returns of the investors. Investors, however, often receive cash dividends or interest payments for their participation, as well as a high social return as these companies flourish.
The food-processing segment, where commodities are turned into value-added products, is directly tied to population and income growth. The companies are notable for their stability, highly palatable balance sheets, and dulce dividend payments. These companies have profited immensely from the changing of American tastes from bland to spicy, domestic to ethnic, and conventionally grown to natural and organic.
The biggest risk to the food processors is inflation. During inflationary periods, these companies often have difficulty passing on commodity price increases.
Social investors have plenty of stocks to take down from the food processing shelves. Core to the Clean Yield universe is Hain Celestial, the packaged organic food and tea company; McCormick, the spice merchant; Heinz which has a robust Chinese and foreign presence (58% of sales) and JM Smucker, which is a still a family run company, but is straying from its roots by adding a few commodity products like coffee and cooking oil. Green Mountain Coffee Roasters, which is a unique hybrid of a commodity and a processed-food company, is another company with many social attributes. However, GMCR has a number of special stock-market-related factors which make it a wait-and-hold stock at this time. We have also added Annie’s to our universe. The organic pasta manufacturer recently debuted as a publicly traded company.
The food distributors and retailers, the companies that move the food products from the processing companies into the hands of consumers, are another group of relatively safe and stable companies. The two most notable ones in the Clean Yield universe are United Natural Foods (UNFI) and Whole Foods (WFM). These are also companies that have benefited mightily from the country’s changing food tastes. UNFI distributes 60,000 fresh and packaged products, mostly in the natural and organic categories, to conventional and natural supermarkets, health-food co-ops, restaurants, and colleges and universities.
Not surprisingly, UNFI’s largest customer is Whole Foods, the supermarket operator that has transformed the industry since its humble origin in Austin 42 years ago. Today it has 300+ stores, with plenty of room to grow. WFMI recently made the news because it committed to building a store in the midtown section of Detroit.
Restaurants are the toughest food category to successfully invest in. Just as they are notorious for their failures on Main Street, so are they on Wall Street. The sector is often bitten by the down periods of the economy, poor weather, and the fickleness of customers who quickly latch on to food fads, and even more quickly abandon them. The only company that we follow closely is Chipotle, the Mexican food chain renowned for promoting sustainable and local agriculture. Unfortunately for value investors, the recent enthusiasm for Chipotle’s stock has driven its valuations from choice to distasteful.
Food-sector stocks should be a core feature of most SRI portfolios. They offer a well-balanced diet of stability and financial returns.Tags: Food Stocks, Summer 2012