Food stocks are a good investment option for investors who like to follow Peter Lynch’s advice to “buy what you know.” With the holiday season kicking off, it’s a time for families, friends and food—and maybe not in that order.
As the last two years have shown, food stocks have a defensive element that is appealing. Despite inflation that is still coming down from 40-year highs, many companies in this sector have proven pricing power that has helped them maintain, and even grow, margins. This has led to revenue and earnings growth that, in many cases, has exceeded the broader market.
According to Statista, global revenue in the food market is expected to grow by 38.46% between 2023 and 2028. At the end of that period revenue will reach $12.97 trillion.
As you look to rebalance your portfolio for 2024, here are three food stocks that look like attractive choices. While two of them carry a premium valuation that may seem hard to swallow, you’ll see why it’s unlikely you’ll be able to gobble them up for a better price later.
Lamb Weston (LW)
Lamb Weston (NYSE:LW) is best known to consumers for its frozen French fries that the company delivers under many popular brand names. The popularity of the company’s products applies to every generation.
However, the growth story for Lamb Weston is about more than in-home consumption. As the company is all too happy to let you know, French fries are one of the highest margin restaurant products. In the context of the holidays, that gives the company two distinct paths for revenue and earnings growth.
Since Lamb Weston completed its spin-off from Conagra (NYSE:CAG) in 2016, the company has delivered a total shareholder return of 221%. The company has plans to increase shareholder equity. In the first quarter of its first quarter fiscal year 2024, Lamb Weston delivered $100 million in share buybacks. The board has authorized up to $500 million.
Lamb Weston doesn’t currently have an impressive dividend, but the company has a target payout ratio of between 25% and 35%, a sizable jump from the current 16% ratio. There’s nothing on the balance sheet that should make you question its ability to do that. The company has a fairly high debt-to-equity ratio of more than 2.0. However, 85% of that debt matures after 2026.
Celsius (CELH)
Food stocks are about more than food. Celsius Holdings (NASDAQ:CELH) has been one of the best tickers to have in your portfolio that aren’t spelled NVDA. CELH stock is up 66% for the year and executed a three-for-one stock split in November.
However, this isn’t a one-year wonder. CELH stock has been one of the best performing stocks in the last five years. The stock price climbed more than 3,900% in that time.
If you’re thinking the stock comes at a premium valuation, you’d be right. CELH stock has a forward P/E ratio of more than 73 times, that is nearly seven times the sector average.
However, it’s all about the guidance. Celsius is projecting revenue growth of more than 53% in the next year. Much of that growth is coming from the company’s partnership with PepsiCo (NASDAQ:PEP) which has a minority stake and distribution rights. The company also has plans to expand internationally, which currently only drives about 5% of the company’s revenue.
Chipotle Mexican Grill (CMG)
Many Americans will be having a traditional Thanksgiving meal in a few days. However, after a day or two, they’ll get sick of leftovers. Plus, it’s the holiday season so there will be more reasons to be out of the house at meal time. Also, Chipotle Mexican Grill (NASDAQ:CMG) has a proven track record of grabbing those consumers whether they’re dining in, carrying out or having their food delivered.
Arguably with Chipotle value may be in the eye of the beholder. CMG stock is up more than 365% in the last five years, and when it comes to food stocks, investors are paying a premium for a stock with a forward price-to-earnings (P/E) ratio of more than 49 times.
However, of the 34 analysts that have given CMG stock a rating in the last 12 months, 25 give it either a “Strong Buy” or “Buy” rating and it does no worse than a “Hold.” The average price target suggests the current share price of more than $2,200 per share may be too high.
However, the company is continuing to expand with approximately 300 stores set to open in 2024. If the company hits its revenue and earnings projections in spite of recent price hikes, analysts may have no choice but to bid the stock higher.
On the date of publication, Chris Markoch did not have (either directly or indirectly) any positions in the securities mentioned in this article. The opinions expressed in this article are those of the writer, subject to the InvestorPlace.com Publishing Guidelines.
