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Food Favorites: The Best Food Brands for Your Portfolio

Food has long been considered a defensive, recession-resistant sector, but with today's investors focused on growth and competitive threats from online purveyors, the sector has been decidedly out of favor. Nevertheless, several MoneyShow.com contributors continue to believe that long-term investors should add food stocks to their pantry:

General Mills (GIS - Get Report) is of increasing interest as a takeover target. Its stock continued to trend upward last month as investors weighed the possibility of an acquisition by 3G Capital.

Thanks to the market-changing purchase of Whole Foods Markets (WFM) by Amazon (AMZN - Get Report) , almost every other food-related stock took a hit. But General Mills remains a solid takeover candidate for 3G.

And the Amazon-Whole Foods deal proves that there's a big shakeup coming in the grocery aisle. I wouldn't be surprised to see a bid for General Mills materialize soon.

Even if that does take some time, we're still holding a great stock. It's undervalued. It has a stellar management team that's squeezing every penny possible out of revenue. Plus, it's paying us a solid dividend that has a 13-year history of annual increases. General Mills remains a Buy anywhere under $60. The 12-month price target is $75.

Hormel (HRL - Get Report) is an international manufacturer and distributor of branded food products -- a recession-resistant business. Its products remain in demand regardless of the state of the overall economy.

Hormel has a mix of higher-priced brands (Muscle Milk, Wholly Guacamole) and bargain brands (Spam, Dinty Moore), and its competitive advantage comes from its strong brand portfolio in a slow-changing industry. Hormel also benefits from its large size, as it regularly acquires smaller brands and scale their businesses.

The company has increased its earnings per share in 28 of the last 31 years (a record achieved by only four companies in the S&P 500), and it has increased dividends for 51 consecutive years in a row.

Hormel saw earnings-per-share grow 21% in 2009 during the worst of the Great Recession. Earnings should continue compounding at 10%+ over full economic cycles. Combined with the 2% dividend yield, we see expected total returns of 12% or more.

With its extremely high-quality business, Hormel has a unique mix of double-digit growth and safety. The stock is trading near its fair value, but should still produce outsized returns moving forward.

In 2015, Kraft and Heinz were combined to form the Kraft Heinz Co. (KHC - Get Report) . Seven of the combined company's brands generate over $1 billion in annual sales: Kraft, Velveeta, Oscar Meyer, Philadelphia, Planters, Maxwell House and Lunchables. Kraft Foods products have a 98% household penetration rate in North America.

Berkshire Hathaway (BRK.B - Get Report) , led by Warren Buffett, owns 26.7% of outstanding KHC shares. Berkshire is the largest investor in Kraft Heinz, and KHC is Berkshire's largest stock investment.

In addition, 3G Capital owns 24.3%. With Buffett's help, 3G Capital has worked hard to increase efficiency at Kraft Foods. The 3G Capital culture of driving efficiency has permeated Kraft Heinz, and margins have expanded palpably since the two companies merged.

Return on invested capital has risen, alongside margin improvements. Earnings are on the rise. Kraft Heinz earned $3.12 a share over the trailing 12 months, compared with $2.81 per share in 2016.

Kraft Heinz has paid a dividend from the start, and that dividend has been increased annually. The quarterly dividend will be paid at $0.625 per share until next June (when it is likely to be raised again), and offers a 3.2% yield.

In fact, everything an investor wants to see rising is trending higher with Kraft Heinz with one exception -- the share price. Kraft Heinz shares closed their first day of trading (July 25, 2015) at $77.38, but are flat over the past 26 months while the S&P 500 has soared 21% over the same time period.

It has been a rare off year for 3G Capital and its capable management team. Nevertheless, we expect the private equity firm's insatiable desire for efficiency to lead to expanding margins across the board. Rarely has it been profitable to bet against Buffett or 3G Capital -- and now is not the time to start. We have a $90 price target on KHC for the next 12 months.

Where Food Comes From Inc. (WFCF) is exactly how it sounds: A company that authenticates and tests food from food producers, sellers and the like. If a company wants to slap a label on their product that says "Organic," "Natural" or anything of the sort, Where Food Comes From is there to ensure that the company meets the rigid standards those labels require.

The company supports more than 12,000 farmers, ranchers, vineyards, wineries, trade associations and restaurants with a wide variety of value-added services.


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