Investors who have an appetite for some cheap stocks with good growth potential may want to order up some food or beverage stocks for their portfolios.
To be sure, many of these companies' shares haven't fared well over the past 12 months: Food manufacturer stocks are off 6 percent, and beverage makers are up just 1 percent for the year. The alcoholic-drink companies have done better with a 7 percent appreciation on average, but none of these industries has performed as well as the S&P; 500 index, which has risen nearly 16 percent over the same period.
Some well-publicized growth problems at industry-giant companies such as Sara Lee and Coca-Cola may have cast a shadow over the entire food-and-beverage group, but investors may have been too hard on some of the more promising firms.
Take candy maker Hershey Foods, for example. The owner of kid-favorite brands including Hershey's, Reese's, Kit Kat and Twizzler has watched its stock dip 18 percent over the past year, due in part to a distribution snafu last fall.
But Hershey, which controls more than 25 percent of the total candy market and more than 40 percent of the world chocolate market, has since corrected the distribution problems that were caused when it rushed to implement a new enterprise software system.
The software is now working properly, and it should help the company better coordinate deliveries and track sales. In time, Hershey should be able to reduce its inventory and save on costs, and that should lead to higher profit.
As for future growth, Hershey isn't relying on its old standby products. In recent years, the company has put new twists on some of its most successful brands. Reese's Peanut Butter Cups now come in sticks, for example, and Jolly Rancher hard candies may also be enjoyed as lollipops. Today, about 20 percent of the firm's total sales come from products that are less than 3 years old. With a price/earnings ratio less than 20, Hershey shares may be a sweet investment.
Among the top-performing beverage companies is Brown-Forman, a wine-and-spirits firm. Maker of top-shelf liquors such as Jack Daniels and Southern Comfort, Brown-Forman has a long tradition of earnings growth and generous dividends.
Brown-Forman, which also owns luggage-maker Hartmann and fine-china brands Dansk and Lenox, has been able to capitalize on some key opportunities in recent years. It purchased the marketing rights to Finlandia Vodka in 1996 and has watched the brand's sales increase by 20 percent annually.
Over the past three years, the company's earnings-growth rate has been about 9 percent on average, and that rate is expected to continue for the next several years. Brown-Forman has also been cleaning up its balance sheet, reducing long-term debt to $41 million in fiscal 2000 from $299 million in 1994.
Brown-Forman stock is cheap on a price/earnings basis. The stock's trailing-12-month P/E is just 16 while the alcoholic-drink-industry average is pushing 20. That's one reason why Brown-Forman shares earn an A- evaluation grade from Morningstar.
Finally, no discussion of the food and beverage industries would be complete without a mention of Kraft, the food giant owned by Philip Morris Cos. Philip Morris shares have been held down over the past year largely due to concerns over litigation associated with the company's tobacco business.
But Philip Morris has said it will sell 10 percent to 20 percent of Kraft Foods to the public, so investors will be able to value Kraft (and its Nabisco Holdings division) separately from Philip Morris' tobacco interests.
Kraft contributes about 30 percent of Philip Morris' profits and may be worth up to two-thirds of Philip Morris' stock price. Watch for these shares to hit the market next year.