General Mills, Ralcorp, Mead Johnson: Top 10 Food Stocks Held by Hedge Funds

General Mills (GIS)After identifying the most popular stocks among hedge funds (see our top 10 here) according to their third quarter 13F filings, we have decided to break down the top ten stocks that hedge funds love in the packaged food industry. Many of these companies provide consumer staple products that allow them to perform well regardless of the economy, as exhibited by their low betas.

Our list includes the hundreds of hedge funds and prominent investors that are required by the SEC to disclose their public equity holdings quarterly. In descending order, we have outlined the most loved packaged food stocks based on the aggregate number of funds owning each.

The J.M. Smucker Company (NASDAQ:SJM) had twenty filers owning its stock last quarter, putting it at tenth on our list. Smucker has a beta of only 0.6 and pays a dividend yield of 2.4%. The food company primarily operates in the U.S. and earlier this year acquired the majority of the coffee/hot beverage segment of Sara Lee. With a forward P/E of only 15x, Smucker can be considered an undervalued investment.

H.J. Heinz Company (NYSE:HNZ) found itself in a tie for eighth with 20 filers. Heinz appears to be another solid dividend play, much like Smucker. This diversified foods company has a beta of only 0.5 and a dividend yielding 3.5%. With a P/E of 18.5x and a forward P/E of 15x, it appears investors have overlooked Heinz’s growth capabilities; sell-side analysts expect a modest 6-7% annual EPS growth over the next half-decade, quicker than the 3.5% annual rate it has averaged over the past five years.

Hillshire Brands Co (NYSE:HSH) was the other company tied for eighth, and saw a net decrease of 9 filers – the largest net decrease of all ten stocks listed – for a total of 20 filers at the end of 3Q. Hillshire was spun off of Sara Lee near the end of 2Q and is the former North American business segment of Sara Lee. The continued hedge fund interest in Hillshire is likely the result of buyout speculation, where top companies such as Hormel and Tyson Foods have been rumored to be considering a takeover of Hillshire. The company’s stock still appears to be a good value, trading at 16x forward earnings while paying a 1.8% dividend yield.

General Mills, Inc. (NYSE:GIS) is in a four-way tie for fourth with 22 filers. A potential drawback to General Mills is its zero-bound beta (read more about why this matters). This international food company is relatively flat year to date but pays a 3.3% dividend yield and trades at one of the cheapest P/E ratios in the industry. At 15x earnings, GIS is a solid buy and provides a good dividend with little volatility.

Green Mountain Coffee Roaster Inc. (NYSE:GMCR) is another company tied for fourth with 22 filers after a net increase of 4 filers last quarter. Green Mountain trades at only 16x earnings compared to its closest competitor Starbucks at 29x. This coffee roaster appears to be trading cheaply looking ahead as well, with a forward P/E of 14x and strong five-year earnings growth expected to be 18% annually. There are reasons to remain cautious, however, given the stock’s near-40% short interest and billionaire David Einhorn’s continued dislike for the coffee company.

The Hain Celestial Group, Inc. (NASDAQ:HAIN), along with our previous two stocks, saw a total of 22 filers owning the stock, putting it tied for fourth. Hain currently trades at the top-end of the industry with a 28x P/E, compared to General Mills, Campbell Soup and Kraft – all with P/E ratios below 16x. Even at this elevated valuation, Hain is still expected to grow EPS at 16% annually through 2017, and a PEG between 1.5 and 2.0 signals the markets aren’t going overboard just yet.

Post Holdings Inc (NYSE:POST) is the final stock tied for fourth, but this packaged foods company saw the largest net filer increase from 12 to 22 of all our stocks mentioned here. Post trades in the mid-range of the industry at 24x earnings, but looks cheap on a forward basis at 16x. Given that Post has a middling expected 8% annual five-year EPS growth, we believe that some of the other food companies might provide better prospects.

ConAgra Foods, Inc. (NYSE:CAG) is tied for second on our list with 24 filers owing the stock as of 3Q. ConAgra looks to be a solid buy with a 3.4 dividend yield and 0.7 beta. The Ralcorp acquisition might be just what the company needs. Prior to the acquisition, ConAgra was expected to grow at a 6% annual clip over the next five years.

Ralcorp Holdings, Inc. (NYSE:RAH) was also in second with 24 filers after a net increase of 3 filers. Ralcorp recently saw a pop of 25% in its stock following the $5 billion buyout offer by ConAgra (read more about the Ralcorp buyout). Since the buyout premium is now embedded into the shares, their trailing P/E is up to 67x, but on a forward basis, it lies at a much more modest 21x. We see the integration into ConAgra as a positive, and look for Ralcorp to help boost the long-term growth rate of its buyer.

Last but certainly not least, Mead Johnson Nutrition CO (NYSE:MJN) was the top packaged food company with 32 filers at the end of 3Q. Mead is relatively flat year to date after several downward revisions on its 2012 outlook, and the stock still trades near the top-end of its industry at 25x earnings. Mead’s forward ratio of only 20x earnings suggests the food company might be a good buy, though, and it pays a decent 1.8% dividend yield. With a double-digit bottom line growth expected, there’s still expansion to be had with Mead, and it is arguably the only ’100% nutrition’ investment in this arena.

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