Food For Thought

Manufacturers of consumer staples, such as food, can deliver delicious profits in a slowing economy

It happens whenever the economy sputters. Wall Street develops an appetite for food stocks the minute bad news crops up. Once there’s talk that a recession is coming, shares of companies like General Mills (NYSE: GIS), Kellogg (NYSE: K), or even Wrigley (NYSE: WWY) start to climb. And sure enough, funds that have large investments in those types of shares tend to join the rally as well.

No, Wall Street isn’t necessarily full of compulsive eaters. Instead, investment pros have come to look at food stocks as a comfort, and go so far as to label companies in the sector as consumer staples. What they mean by the term is that demand for these products remain constant; companies that process, manufacture, and sell food will probably see steady sales and solid earnings no matter what else is happening in the economy. Yes, when money is tight and budgets are crimped, consumers may postpone the purchase of a new ride or hold off on lavish vacations. But no matter how tough things get, nobody plans to stop filling the refrigerator.

Look at last year’s stock market stats and you’ll see that investment pros were already starting to get hunger pangs. At the end of October, the Standard & Poor’s index for food stocks was down just 3.4%, compared to a 15.3% drop, recorded by the S&P 500. At the same time, mutual funds with heavy weightings in the food industry were holding strong. Take for example, the Fidelity Select Food & Agriculture (FDFAX), a portfolio that had a little more than 70% of its assets parked in food stocks — more than any other fund, according to Morningstar data. As of October 31, Fidelity’s food fund was off just 3.3% for the first 10 months of 2001, yet, it gained a 6.9% total return over the previous year.

S&P’s investment strategist, Sam Stovall, thinks the food industry could well continue a strong showing in 2002. For one, prices for key ingredients, such as corn, soybeans, and wheat remain low. Also, food shares are relatively cheap compared to the broad market. “While S&P’s investment outlook for food stocks have moderated, they could regain investor interest should this recession last longer than anticipated,” he says.

We kept those projections in mind as we sifted through Morningstar data looking for a few food funds that could provide you shelter should the stock market skid in the months ahead. While we screened Morningstar’s numbers, we looked for funds that had invested 10% or more in food companies. We also aimed for an extra layer of protection in case of market troubles ahead, targeting funds that were heavily invested in other consumer staple stocks, including companies that make soap, detergent, and household products. Those other consumer staples are bound to hold up well in a storm for the same reasons that food stocks should — most everyone finds money to pay for cleansers and toothpaste.

After sifting through the numbers, we came up with five funds. Some, such as the Fidelity portfolio

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