What Is Going On With These Trending Consumer Staples Stocks?

With markets heading towards closing today’s trading session on a positive note, shares of Kellogg Company (NYSE:K), Diamond Foods, Inc. (NASDAQ:DMND), Kimberly Clark Corp (NYSE:KMB), TreeHouse Foods Inc. (NYSE:THS), and ConAgra Foods Inc (NYSE:CAG) are trending in afternoon trading for various reasons. Let’s find out why.

First a little bit about ourselves. We at Insider Monkey track smart money activity. From one point of view we can argue that hedge funds are consistently underperforming when it comes to net returns over the last three years, when compared to the S&P 500. But that doesn’t mean that we should completely neglect their activity. There are various reasons behind the low hedge fund returns. Our research indicated that hedge funds’ long positions actually beat the market. In our back-tests covering the 1999-2012 period hedge funds’ top small-cap stocks edged the S&P 500 index by double digits annually. The 15 most popular small-cap stock picks among hedge funds also bested passive index funds by around 53 percentage points over the 36 month period beginning from September 2012 (see more details here).

Consumer staples is a pretty boring sector. Given the companies don’t change very much, investors get excited when their stocks rally 1% versus the broader market on any given day. So when news hits the wires that their consumer staples companies are considering selling themselves or merging with others in accretive deals, investors jump for joy.

The New York Post is reporting that Kellogg Company (NYSE:K) is in ‘late-stage talks’ to acquire Diamond Foods, Inc. (NASDAQ:DMND) in a $1.5 billion deal that could give Diamond Food shareholders between $35-$40 per share for their stock. A source has told the New York Post that:

“Kellogg is somewhere between aggressive and desperate to use mergers to try to evolve its business away from breakfast cereal.”

Diamond Foods has successfully turned itself around after a disastrous 2011, having beaten analyst earnings estimates for five straight quarters. At $34 and change, Diamond Foods’ shares are more than double their lows in 2012, although the company could certainly use the synergies from a Kellogg deal to increase its margins.

According to our data of around 730 elite investors, hedge funds were bullish on Diamond Foods, Inc. (NASDAQ:DMND) in the second quarter. A total of 17 funds reported stakes worth $230.7 million (representing 23.40% of the float) in the previous round of 13F filings, versus 16 funds and $220.36 million respectively a quarter earlier. Howard Marks‘ Oak-tree Capital Management kept its position the same as 4.42 million shares, while Ken Griffin’s Citadel Investment Group increased its stake by 8% to 936,985 shares.

In other news, Kimberly Clark Corp (NYSE:KMB) is trending after Reuters announced the company is in talks to acquire Hypermarcas’ diaper business, which generated around $220.9 million in revenues last year. Given the macroeconomic situation is Brazil is terrible as growth slows and inflation rises, Kimberly Clark’s diaper acquisition is not going to pay immediate dividends, but investors are confident that the management will find enough synergies in the deal to make it worthwhile in the medium term. Once Brazil’s macroeconomic climate improves as commodity prices recover, the deal could be a big plus for the company. Given the dividend yield of 2.91% and forward P/E of 19.61, shares of Kimberly Clark Corp (NYSE:KMB) are attractive.

On the next page, we analyze why TreeHouse Foods and ConAgra Foods are trending today.