February 2005  Email this  Print this
 License or reprint this article
STOCKS
Add Starch to Your Portfolio
by Jeffrey R. Kosnett
Low-carbohydrate diets have trimmed waistlines as well as the share prices of bread, cereal and pasta purveyors. But the Atkins diet fad appears to be losing steam, so it could be time to position your investments to take advantage of the Atkins backlash. How much have the Atkins craze and the similar South Beach Diet receded? Less than 5% of Americans were on low-carb diets in August, down from a high of 9% last winter, says research firm NPD Foodworld. And half of the people who tried the low-carb approach have given it up, according to InsightExpress, another market researcher.
Oprah and Dr. Phil
As a result, high-carb foods will make a small but noticeable return to menus in 2005, predicts analyst Sue Perram, of investment banker Avondale Partners. "I expect a rebound, but not to the pre-Atkins levels," she says. More dieters are choosing high-fiber foods, which have plenty of carbs. Among the high-fiber advocates are Oprah and Dr. Phil. His bestselling diet book is catching up with the bestselling South Beach Diet book and is far outpacing the most popular Atkins book.
But carb-craving investors need to be discriminating. Companies such as American Italian Pasta and Krispy Kreme Doughnuts offer carbs to spare. But those two companies have other problems that a change in diets won't cure.
Focus on stronger companies, such as Campbell Soup (CPB). In addition to selling the soups that Andy Warhol made famous, Campbell markets Pepperidge Farm. Look for a boost from Pepperidge Farm's super-premium breads. That category has been growing 5% to 10% per year, says analyst Mitchell Pinheiro of Janney Montgomery Scott.
Shares of Campbell, which struggled early this decade because of lukewarm sales of condensed soups, peaked at $58 in 1998 and hit $20 in 2002. But management changes, better marketing efforts and product innovations are paying off, says Pinheiro. Campbell reported ultra-hearty sales growth of 10% in the quarter that ended last October. Meanwhile, the stock has recovered to $30 and sells at a reasonable 17 times the average analyst's earnings estimate of $1.73 per share for calendar 2005.
Pasta push
If carbs return to American menus, so will pasta, which could boost restaurant chains that dish it up. Brinker International (EAT) is a multi-chain restaurant operator whose second-largest unit is Romano's Macaroni Grill. The chain, which plans to expand its current base of 224 restaurants by about 8% in 2005, has lagged behind the pasta restaurant leader, Darden Corp.'s Olive Garden chain, in sales growth per eatery. But Olive Garden is present in many more markets, so Macaroni Grill is more likely to grow faster through the addition of more locations, says analyst Matthew DiFrisco at Harris Nesbitt. Brinker, at $34, sells for a reasonable 15 times estimated calendar '05 earnings of $2.24 per share.
A less obvious choice is PepsiCo (PEP). The soft-drink giant owns two major carb providers, Quaker Oats and Frito-Lay. PepsiCo, which derives 62% of sales from food, is known for innovative products and packaging -- such as single servings of Quaker oatmeal in microwaveable containers and baked snack foods from Frito-Lay. At $51, or 20 times projected 2005 profits of $2.56 per share, the stock isn't cheap. But it's a good bet that PepsiCo will stay a step ahead of diet fads.
Research: Elizabeth Kountze |
MAGAZINE
