Sep 3, 2010 9:02 AM PDT
Want to know what the sexiest, highest potential group of small cap stocks is coming out of the May funk we just suffered through? Here's a hint.... have you eaten anything today? That's right, food is one of my big picks for the remainder of the year.
Don't laugh - the S&P Small Cap Food Distributor Index is the small cap group's best performer for the week, thanks to strong moves from the likes of B&G Foods, Inc. (NYSE:BGS), Spartan Stores, Inc. (NASDAQ:SPTN), Nash-Finch Company (NASDAQ:NAFC), and tiny Overhill Farms Inc. (AMEX:OFI) [which isn't even an S&P 600 stock, but contributed greatly to the broad bullish effort here].
And here's the really cool part.... while those four names are all technically sound, with stocks that are pointed higher, each is also fundamentally sound.
Overhill Farms is sitting on a P/E of 10.6, and a net margin of 4.5% (which is huge by food standards). Nash-Finch and Spartan Stores are both headed into P/E ratios in the 11-ish range for 2010, which is attractive enough on its own. Both have posted positive EPS surprises in three of their last four quarters though, so the attractive P/E ratios may still be too high of an estimate. And B&G Foods? The net income level has settled down to downright reliable levels; the company is expected to earn $0.79 per share this year, and $0.84 next year. Not bad.
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That said, this is an industry call as much as it is a set of stock picks, and it's driven by one key quality I like in a chart.... consistency.
While the S&P Small Cap Food Distributor has seen plenty of daily ebb and flow, on a longer-term, weekly basis the trend is undeniable. Take a look at the chart of it below - a reliable uptrend that appears to be accelerating again. The dip over the last two weeks is simply a window of opportunity.
I already know the counter-arguments.... food is a defensive, value idea, and it won't fly when the market starts to think 'aggressive growth' again. I hear you. The thing is, Overhill Farms, B&G Foods, Spartan Stores, and Nash-Finch Company DID participate in the 2009 rally - just as much as any other group did. Over the last twelve months, BGS, NAFC, OFI, and SPTN are up 22%, 0% (one stumble), 29%, and 9%, respectively. The S&P 500 is a tad in the hole for the same timeframe..... most of which saw the 'aggressive growth' thinking that's supposed to leave boring food stocks in the dust.
Point being, assumptions can be dangerous.
As for me and my money, both real and hypothetical, I'll take the boring, and the reliable progress it's been dishing out (no pun intended).
Now, as far as the four stocks I mentioned go, Overhill Farms is my favorite... if it can clear the resistance line at $6.34. B&G Foods probably has the most established momentum, though that just means it's that much closer to being overbought; pick and choose your spots.
Spartan Stores and Nash-Finch Company are somewhere in-between - not struggling with a technical ceiling, and exhibiting more and more momentum as they pull out of the funk. I think either are fine for now; just put OFI and BGS on your watchlist.
By the way, I WILL be adding one ore more of these stocks to my official public portfolio. If you'd like to know when or which I do (and to follow all my picks, with rationales), then be sure to sign up for the free newsletter.
