"Safe" is a relative term for food stocks

By Brad Dorfman - Analysis

CHICAGO (Reuters) - The idea that stocks in food companies are a safe haven because people always have to eat is being put to the test in a world shocked by recession fears.

People still need to eat, but they do not necessarily have an appetite for higher-priced branded foods. That is forcing investors to pick and chose which food stocks provide safety.

But the things investors typically prize about food companies in a bear market -- such as stable, predictable cash flow -- remain in place, and the recent slide in the market makes for some attractive investments, analysts said.

"The door is open to pursue best-of-breed companies without paying best-of-breed prices," Edward Jones food analyst Matt Arnold said,

Still, while food companies may also benefit as prices for wheat, oil and other commodities fall from historically high levels, companies with weaker brands might be forced to give up some of the price increases that have lifted their sales.

"It's not like you can go into the food stocks in a secular bear market and make money where other stocks are losing money, or else everybody would own them," said Matthew Kaufler, a portfolio manager at Touchstone Value Opportunities Fund.

The Standard & Poor's U.S. packaged foods index has fallen about 14 percent in October, compared with a 24 percent drop by the S&P 500.

That difference in itself shows that the market thinks that while everyone will feel some pain in a global slowdown, the amount of "pain" is relative.

"The pressure that Coke and Pepsi might feel is going to be a lot different than a major steel producer," Morningstar analyst Gregg Warren said.

Both Coca-Cola Co and PepsiCo are in "five-star territory" at Morningstar, meaning they are stocks that are trading below what Morningstar sees as fair value by enough of a margin to give some safety.

Other stocks that fit that category are Nestle and Kraft Foods Inc, while Kellogg Co and Campbell Soup Co are "getting close," Warren said.

Kraft trades at about 14 times forecast 2009 earnings and is seen by other analysts as an investment that is becoming more attractive.

The company has spent several years closing factories, cutting fixed costs and spending more on advertising and new product development. The latter has paid off in higher sales and some analysts think the company is priced right.

"It's a business that is showing evidence of hitting its stride," Edward Jones's Arnold said.

Kaufler cited General Mills Inc as attractive.