Hedge Funds Are Betting on These Five Packaged Foods Stocks

Although they don’t grow as fast as tech companies do, or pay as high of a dividend as utilities do, many consumer staples products outperform the market over the long run. With their slow and steady approach, consumer staples such as Mondelez International Inc (NASDAQ:MDLZ), Kraft Heinz Co (NASDAQ:KHC), J M Smucker Co (NYSE:SJM), Mead Johnson Nutrition CO (NYSE:MJN), and Post Holdings Inc (NYSE:POST) win loyal customers for life by providing solid products at reasonable prices. Therefore, it is not surprising that smart money investors are betting on these stocks.

Why do we pay attention to hedge fund sentiment? Most investors ignore hedge funds’ moves because as a group their average net returns trailed the market since 2008 by a large margin. Unfortunately, most investors don’t realize that hedge funds are hedged and they also charge an arm and a leg, so they are likely to underperform the market in a bull market. We ignore their short positions and by imitating hedge funds’ stock picks independently, we don’t have to pay them a dime. Our research has shown that hedge funds’ long stock picks generate strong risk adjusted returns. For instance the 15 most popular small-cap stocks outperformed the S&P 500 Index by an average of 95 basis points per month in our back-tests spanning the 1999-2012 period. We have been tracking the performance of these stocks in real-time since the end of August 2012. After all, things change and we need to verify that back-test results aren’t just a statistical fluke. We weren’t proven wrong. These 15 stocks managed to return 102% over the last 37 months and outperformed the S&P 500 Index by 53 percentage points (see the details here).

#5 Post Holdings Inc (NYSE:POST)

– Number of Hedge Fund Holders (as of September 30): 41
– Total Value of Hedge Fund Holdings (as of September 30): $1.36 billion
– Hedge Fund Holdings as Percent of Float (as of September 30): 42.10%

Although Post Holdings Inc (NYSE:POST) missed analyst EPS expectations by $0.23 per share and revenue estimates by $30 million for its last quarter, the sell side is bullish on the stock. Eight analysts have ‘Buy’ ratings, and one has a ‘Hold’ rating and none of the analysts covering the stock have a ‘Sell’ rating. Because of good M&A deals, Post Holdings’ shares are up by 46% year-to-date, and analysts think Post has an additional 18% upside with a consensus price target of $72.71 per share. John Paulson‘s Paulson & Co raised its stake in the company by 29% to 3.71 million shares during the third quarter.

#4 Mead Johnson Nutrition CO (NYSE:MJN)

– Number of Hedge Fund Holders (as of September 30): 43
– Total Value of Hedge Fund Holdings (as of September 30): $1.63 billion
– Hedge Fund Holdings as Percent of Float (as of September 30): 11.40%

China lifting its one-child policy for the first time in several decades is certainly good news for Mead Johnson Nutrition CO (NYSE:MJN). As a global leader in baby milk formula products, Mead Johnson Nutrition Co’s top and bottom lines will grow the number of infants in China increases. The company’s management has also been shareholder-friendly, with the company recently implementing a cost cutting initiative and announcing a buyback that could reduce its float by as much as 10%. Because of consolidation in the industry, the company could also be a potential takeover target. Jim Simons’ Renaissance Technologies is among the funds that owned a stake in the company at the end of the third quarter.

#3 J M Smucker Co (NYSE:SJM)

– Number of Hedge Fund Holders (as of September 30): 47
– Total Value of Hedge Fund Holdings (as of September 30): $1.58 billion
– Hedge Fund Holdings as Percent of Float (as of September 30): 11.50%

The smart money is becoming more bullish on J M Smucker Co (NYSE:SJM). A total of 47 funds from our database were long J M Smucker shares (amassing 11.5% of the company’s stock) at the end of the third quarter, up from 30 funds a quarter earlier. Among the funds that increased their positions are John W. Rogers’ Ariel Investments and Ricky Sandler’s Eminence Capital. Given that the stock recently broke above a key technical level and trade at a reasonable 19 times forward earnings estimates, J M Smucker shares have more upside ahead.

#2 Kraft Heinz Co (NASDAQ:KHC)

– Number of Hedge Fund Holders (as of September 30): 56
– Total Value of Hedge Fund Holdings (as of September 30): $25.99 billion
– Hedge Fund Holdings as Percent of Float (as of September 30): 30.40%

Because Kraft Foods and Heinz recently merged to form Kraft Heinz Co (NASDAQ:KHC), the company has considerable synergies that management hasn’t unlocked yet. The company’s management estimates that Kraft Heinz has an annual cost efficiency and synergies opportunity of around $1.5 billion that the company can realize by 2018. Shareholders can afford to wait, as the stock also pays a 3.25% dividend yield. Warren Buffett’s Berkshire Hathaway is one of the top shareholders of the company, owning 325.63 million shares.

#1 Mondelez International Inc (NASDAQ:MDLZ)

– Number of Hedge Fund Holders (as of September 30): 69
– Total Value of Hedge Fund Holdings (as of September 30): $6.88 billion
– Hedge Fund Holdings as Percent of Float (as of September 30): 10.20%

Mondelez International Inc (NASDAQ:MDLZ) has been a winner for Bill Ackman’s Pershing Square, as shares of the company are up by 20.6% year-to-date. Mondelez management has taken the famous activist’s advice and is considering selling non-core assets and cutting costs. The company has already implemented a $3.5 billion cost cutting strategy to be completed by the end of 2018 and is also considering selling its European cheese and grocery business. A potential sale to Kraft or another conglomerate a few years from now isn’t out of the question either.

Disclosure: none