Investment opportunities spread on the picnic table. Over the past several years, investors have gotten used to the technology sector driving the broader market. But just because technology has led the market for so long does not mean that it will last To do so in the future. The performance of the sector has traditionally been alternating over time, with past leaders becoming future laggards and past laggards becoming future leaders. This sector rotation continues over time for good reason, and the market has now entered a phase where the long neglected packaged food industry within the FMCG sector is becoming more and more appetizing.
Business cycle break. Why has the technology sector led the market for so long? In part, it was a byproduct of Federal Reserve policy and its effects on the business cycle. Many sectors of the business cycle are not necessarily well suited for technology to perform well. But because the US economy has been chronically stuck in a phase of slowly improving economic growth that has been boosted in part by continued accommodative monetary policy, the economy has remained locked in a phase that resembles an early-to-medium expansion phase. This subsequently propelled the stock market into a mid-stage bull market, the ideal point in the business cycle and market cycle for tech stocks to perform well.
Much has, of course, changed with our place in the business cycle since late 2021. A sharp rise in inflation pressures has shifted the Federal Reserve from its ultra-easy stance on zero-interest monetary policy and quantitative easing toward a tough tightening approach to slow the economy and limit upward price pressures. We have accelerated this dramatic shift along the business cycle towards an economy that is now peaking and beginning to deteriorate. And the fact that markets traditionally move several months ahead of the economic cycle may help explain why the US stock market has plummeted since late last year after peaking at the beginning of 2022.
Consumer staples, not technology, is the historically best performing sector during this specific phase of the business cycle. This is largely due to the fact that these more defensive companies are more likely to offer earnings predictability and continued stock price growth along with relatively low stock price volatility and the potential ability to pass on higher prices to consumers which are all particularly attractive to investors at this economic stage. Unconfirmed. Within the FMCG sector, packaged food companies have historically shown a tendency to perform particularly well during these periods. After all, even though many of these companies continue to operate with varying degrees of operational restructuring, the one thing we all have to do more than anything else regardless of what might happen in the economy at any given time is erosion.
food for thought. Let’s take a closer look at packaged food stocks and their performance since the US stock market peaked at the beginning of the year. The S&P 500 index contains twelve companies from the packaged food industry. These are mentioned below:
Mondelez Airport (MDLZ)
General Mills (GIS)
Hershey Airport (HSY)
Kraft Heinz (KHC)
Tyson Foods (TSN)
Conagra Brands (CAG)
Hormel Foods (HRL)
JM Smoker (SJM)
Campbell’s Soup (CPB)
Lamb Weston (LW)
It’s worth noting that each of the companies listed above has an investment grade credit rating of BBB- or better than S&P except for the spin-off Conagra Lamb Weston, which is right on the cusp of BB+. Each also offers dividends averaging 2% across the group, and many have a long-term track record of increasing their payouts each year. And all but two of the names — Tyson Foods and Lamb Weston — rank in the lowest segment of stocks for price volatility in the S&P 500. In short, packaged food companies suit such types of stocks that attract investors at this stage of the business cycle.
Proven track record of superior food performance over previous similar phases. Driving this packaged food stock at the economic peak and beyond is nothing new, as this segment of the market has shown a tendency to deliver significantly positive absolute returns and a relative outperformance during challenging past periods.
For example, in the first two years after the tech bubble burst in March 2000 through late spring 2002, the 10 stocks listed on the above packaged foods list were actively trading at the time (Kraft Heinz were two separate companies of Kraft Foods and HJ Heinz, while Lamb Weston (still a part of Conagra) had an equal positive return of +60% at a time when the broader S&P 500 was down ~-40% in that advanced stage of the bear market at the time. The following chart shows some of the distinction names from the group during this period 2000-2003.
After the onset of the financial crisis in 2007, this food group was collectively only -10% lower during the month of November after the collapse of the Lehman Brothers versus the S&P 500 which was more than -40% lower at that point in the bear market. This includes three stocks that were still trading higher during the same time period – General Mills, Kellogg, and Campbell Soup. The following chart contains a few distinct names from the food group during the 2007-2009 span.
Many packaged food stocks performed well during the onset of COVID in early 2020. While the weighted average of the total group declined during this time period, seven out of twelve names in the packaged food industry group had higher trading in the first month after the outbreak began. The global COVID-19 outbreak that started in mid-February until two days before the broader market bottomed on March 23 of that year. The following chart shows a number of these names that were holding the positive territory late in the COVID correction.
So how have these stocks performed since the peak of the broader market at the beginning of 2022? Overall, these twelve stocks have produced an equal weighted average return of close to +3% in a broader, lower market of more than -13% over the same time period thus far. The chart below shows some of the new winners from the group.
Not too bad in terms of relative outperformance in a challenging market environment. Moreover, packaged food stocks were collectively up more than 10% earlier in May before disappointing sales results from the likes of Walmart (WMT) and Target (TGT) spilled over those stocks since the middle of the month.
minimum. While the broader S&P 500 index has been struggling throughout 2022, a number of sectors and industries continue to perform well and generate positive returns. The packaged foodstuff industry is classified under the FMCG sector within this group. Given our place in the business cycle, investors may be well served to look beyond technology that is increasingly fading into the rearview mirror of the business cycle and instead focus their research attention on those stocks that are set to benefit the most from where we are in the business cycle. Business today as well as those sectors and industries that will benefit the most from where we go next.