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Will Food Stocks Be a Losing Bet in 2018?

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Credit Suisse is skeptical about food stock prospects

Packaged food manufacturer stocks in the US have been trading in the red and could disappoint investors in upcoming quarters. The soft organic sales (excludes the impact of M&A and currency movements) trend amid the consumer shift towards healthy foods and pressure on margins from the inflation in raw material and logistics costs continue to take a toll on food stocks.

Meanwhile, increased investments to support sales and a prolonged price war among retailers, which was exacerbated by the expansion of Amazon (AMZN), further squeezed their margins and more than offset the benefits stemming from cost savings.

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Given the industry-wide challenges, Credit Suisse downgraded Kraft Heinz (KHC) and J.M. Smucker (SJM) stock. In addition, it also lowered the price target on several packaged food manufacturers including Hershey (HSY), Mondelēz (MDLZ), Conagra Brands (CAG), General Mills (GIS), and Kellogg (K). Also, the company reinstated its coverage on Campbell Soup (CPB) stock with an “underperform” rating and a price target of $40.

Earlier, the investment bank stated that it expects packaged food manufacturers to modestly underperform the broader markets and see low-single-digit growth in their stocks.

YTD stock performance

As discussed earlier, stocks of packaged food manufacturers have largely underperformed the broader market and are trading in the red. As of April 16, 2018, General Mills, Kraft Heinz, Hershey, and Campbell Soup stocks have seen YTD (year-to-date) declines of 23.7%, 21.3%, 14.7%, and 11.0%, respectively. Meanwhile, Kellogg, J.M. Smucker, Mondelēz, and Conagra are down about 7.2%, 2.6%, 1.3%, and 1.2%, respectively. In comparison, the S&P 500 Index remained flat on a YTD basis as of April 16, 2018.

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