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Investing in Mid Cap Consumer Staples

The All-Terrain Vehicle of Stocks

Written by Briton Ryle
Posted March 13, 2014

Consumer Staples Grocery Store Groceries

Throughout the past 15 years, the U.S. stock market has rolled up three bull mountains (1995-2000, 2003-2007, 2009 to present), down two market ravines (2001-2003 and 2008-2009), and a whole lot of rolling hills in between.

So which investment vehicles would have taken you the furthest across all that terrain? The mid-caps. Over the past 15 years, the S&P 400 mid-cap index has returned 9.97 percent in annualized returns, as compared to the Russell 2000 small cap index at 8.42 percent and the Dow Jones Industrial Average of large caps at 6.46 percent.

Why did mid-caps outperform? Because small-cap stocks are your zippy autos built for speed and agility which outperform all other road vehicles on smoothly paved highways but suffer the most when markets encounter rough terrain.

Conversely, large-caps are your sturdy off-road vehicles built for endurance and roughness. Their large capitalization, market dominance and torrential cash flows allow them to stay the course during recessions, but their market saturation slows them down during the bull runs.

Yet in between these two extremes, the mid-caps serve as your all-terrain investment vehicles that are sturdy enough to endure the rough recessions yet nimble enough to zoom along the smooth economic expansions. And among the more enduring mid-caps we have our consumer staples – those everyday products and services that consumers just won’t do without in any economic cycle.

So let’s take a look at a couple of these multi-terrain investment vehicles that have carried us nicely along the market’s past ups and downs, and should likewise carry us through the next series of bull and bear runs.

Flowers Foods Ltd (NYSE: FLO)

For a $4.17 billion mid-cap, Flowers Foods has climbed a stellar +1,000 percent, compared to the S&P 500 broader market’s gains of around +75 percent. While more than a third of that growth was gained in 2013, its stock was still up an outstanding +600 percent at the end of 2012.

The Thomasville, Georgia-based company originally founded in 1919 produces and markets bakery foods including fresh breads, buns, rolls, tortillas, and snack cakes. It boasts an extended line of well-known brands such as Nature’s Own, Wonder, Whitewheat, Tastykake, Bluebird, Cobblestone Mill, Merita, Home Pride, Butternut, Mary Jane & Friends, ButterKrust, Evangeline Maid, Captain John Derst’s, Barowsky’s, Mi Casa, Frestillas, Dandee, Country Hearth, Natural Grain, Leo’s Foods, and Juarez, as well as franchised and licensed brands including Sunbeam, Roman Meal, Bunny, Holsum, Aunt Hattie’s, and Country Kitchen brands. Almost every American has at some point eaten one of their products.

How does Flowers Foods compare with the bigger players in its space, say to Kraft Foods now known as Mondelez International (NYSE: MDLZ)? Since 2001, the $59 billion Mondelez large-cap stock has grown a mere 60 percent, slightly worse than the broader market’s S&P 500.

In annual revenues relative to market cap, FLO pummels MDLZ. FLO’s last year’s revenues of $3.75 billion measure 90 percent of its market cap, while MDLZ’s revenues of $35.3 billion are just 59 percent of its market cap.

Both companies reward their shareholders equally well. Where FLO passes $230.89 million in net income to its shareholders, or 6.16 percent of its revenues, MDLZ passes $2.31 billion in net income to its investors for a slightly better 6.54 percent of its revenues.

Yet in management’s efficiency at generating shareholder equity value, Flowers Foods outperforms Mondelez by a wide margin. Where FLO’s returns on assets and equity register 8.38 percent and 23.87 percent respectively, MDLZ’s returns pale by comparison at just 3.81 percent and 7.18 percent respectively. Just another example of how a mid-cap company is nimble enough to negotiate the twists and turns of the economic highway better than the clumsier large-cap behemoths.

It must be noted, however, that if value investing is your style, you might find Flowers Foods’ stock price a little rich, and see better value in Mondelez. Where MDLZ’s price to book value registers 1.84 times, FLO’s stock price is much overvalued at 3.94 times its book value.

But while this means FLO’s stock may have run a little too far ahead of itself, it can also signify that investors see greater future potential in FLO and are thus willing to pay a little more premium in order to partake of that growth. In this regard, FLO’s PEG ratio (price-to-earnings-to-growth) of 1.16 is leaner than MDLZ’s PEG of 1.65 – meaning that FLO’s stock price is actually undervalued relative to the growth of its earnings.

For this reason, analysts rate Flowers and Foods a buy at 2.2 on a scale of 1 to 5 (1/buy, 5/sell), while rating Mondelez at 2.5. Analysts see a lot of room for FLO’s stock to grow from its current price of $20.01 to their low target of $22, high target of $25, and mean target of $23.86 representing an average upside potential of 19 percent. Meanwhile, they see MDLZ’s current price of $35.07 falling to a low target of $28 and rising to a high target of $45 for a mean target of $36.33 or 3.6 percent average upside.

Green Mountain Coffee Roasters Inc (NYSE: GMCR)

What can we say about Green Mountain Coffee Roasters but wow! Although it has been a large cap for a while now – with a current market cap of $15.9 billion – this consumer staple has proven itself to be a multi-market cycle stock that will move investors forward come what may. Since 2002, its stock has screamed past all major indices posting gains of +7,000 percent. Though it has been fairly volatile – ranging from $30 in 2010 to $110 in 2011 back down to $20 in 2012 and back up to $107 today. Still, analysts smell the aroma of powerful potential still ahead.

Founded in 1981, the Waterbury, Vermont company is a dominant player in the specialty coffee and coffeemaker market across the U.S. and Canada. Its product line comprises 290 varieties of coffee, hot chocolate, teas, and other beverages in regular cup, K-Cup and Vue portion packs. It also markets other specialty beverages including hot apple ciders, hot and iced teas, iced coffees, iced fruit brews, and a variety of milks.

As for its annual revenues relative to market cap, GMCR’s last year’s revenues of $4.41 billion measure a mere 27.5 percent of its market cap, a poor comparison to MDLZ’s 59 percent and FLO’s 90 percent.

But where shareholders are concerned, GMCR gives its investors the royal treatment, passing $513.88 million in net income to common stock, or 11.65 percent of its revenues, compared to MDLZ’s 6.54 percent and FLO’s 6.16 percent.

In management’s efficiency, too, GMCR employs a team that has excelled at adding shareholder equity value, generating returns on assets of 14.05 percent, representing a better use of assets than FLO’s 8.38 percent and MDLZ’s 3.81 percent returns.

GMCR’s stellar performance, however, has resulted in a truly overvalued stock, which gauges 6.21 in price-to-book value – much richer than FLO’s 3.94 and MDLZ’s 1.84.

Even so, GMCR’s low PEG ratio of 1.68 relatively close to MDLZ’s 1.65 signifies that the specialty coffee roaster’s earnings growth rate justifies its stock price which is not overvalued based on earnings potential.
For this reason, analysts give Green Mountain a buy rating of 2.1, the best of the three picks considered here.

They see GMCR’s stock currently trading at just under $108 as already sitting at their low target of $108, and with plenty of upside potential to a high target of $150 and a mean target of $125.11. This represents growth potential of some 16 percent above today’s price, as compared with FLO’s 19 percent and MDLZ’s 3.6 percent upside.

Riding the Ups and Downs

The one great aspect of consumer staple stocks such as Mondelez, Flowers and Foods, and Green Mountain is that their products are consumed pretty much without disruption through all market cycles.

Green Mountain’s more expensive specialty coffee sales may drop a bit during recessions, but consumers will forgo a night out on the town before sacrificing their daily cup of coffee. They would even be more inclined to park their vehicles and take the bus than go without their daily fix of caffeine.

Foods and beverages stand the test of market booms and busts, and will continue to provide good growth potential and capital preservation through all the twists and turns of the investment highway ahead.

While you can still get better short term performance from your zippy small caps during those bull market straightaways, or from your durable large caps during those bumpy potholed recessions, never underestimate the lasting performance of your general purpose all terrain investment vehicles – the mid-caps.

If you’re the type of investor who doesn’t like to spend an excessive amount of time replanning and retweaking your holdings too often, your middle-of-the-road mid-cap consumer staples are the perfect investment vehicles that will move you forward with minimal maintenance required.

Joseph Cafariello

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