Stocks like this always catch my eye, as they can be very profitable investments when caught at the right time. However, with shares right at their 52-week high, is now that time, or should investors run screaming for the exits?
About Dean Foods
Dean Foods Co (NYSE:DF), as mentioned, is the leading U.S. dairy producer, with most of its sales coming from the company’s Fresh Dairy Direct segment, which sells refrigerated dairy products directly to stores. Products include milk, ice cream, cheeses, creamers, and other types of dairy products.
In 2012, almost 20% of Dean Foods Co (NYSE:DF)’s sales came from their WhiteWave segment, which they are planning on splitting off. WhiteWave Foods Co (NYSE:WWAV) actually completed an IPO in October of last year, with Dean still holding an 87% stake, which it plans to spin off later this month. Dean plans to retain approximately a 20% holding in WhiteWave after the split.
WhiteWave Foods Co (NYSE:WWAV) makes the popular Silk soy milk, almond and coconut milks, and the Horizon organic line of dairy products. They have actually been one of the most profitable aspects of Dean Foods Co (NYSE:DF)’s business in recent years.
With the growing number of health-conscious consumers, I actually view the loss of WhiteWave Foods Co (NYSE:WWAV) as a major negative for the success of Dean Foods, although current shareholders could certainly benefit from the split for the following reason: Because this is a growing trend, I wouldn’t be surprised if WhiteWave Foods Co (NYSE:WWAV) becomes a takeover target for one of the food giants such as General Mills, Inc. (NYSE:GIS) in order to capitalize on this trend.
As an investment
So, as things stand now, before the spin-off, is Dean Foods Co (NYSE:DF) worth a look. Well, for one, investors will need a strong stomach to ride out the ups and downs in Dean. In terms of historic volatility, which is defined as the average standard deviation from the stock’s average price over the course of one month, the stock comes in at a relatively high 49.2%. In other words, if the stock averaged $18 in an average month, it would trade in a range of between $13.57 and $22.43. Talk about having to time your entry just right!
In contrast, General Mills, Inc. (NYSE:GIS)’ historic volatility is just 12.3%, meaning that if its average price in a month is $50, it would only fluctuate between $46.93 and $53.08. That is, the exact timing of your entry point is not nearly as important to your long-term success in the investment. Additionally, General Mills, Inc. (NYSE:GIS) actually trades at a lower valuation that Dean, at 18.6 times TTM earnings versus 22.8 for Dean Foods Co (NYSE:DF). General Mills, Inc. (NYSE:GIS) also rewards their shareholders with a nice 3% dividend yield, while Dean doesn’t pay anything.
So, what to do?
For those who don’t have the stomach for 50% fluctuations in their portfolio on a regular basis, you are better off with one of the larger, more stable food companies such as General Mills, Inc. (NYSE:GIS). If, on the other hand, you can stomach a little more risk, I still don’t think Dean is the way to go.
The best play here, if you have the risk tolerance, would be to buy shares of WhiteWave Foods Co (NYSE:WWAV), which can reward investors in two ways. First, the nature of WhiteWave’s products should mean growth in the years ahead, especially if Americans really begin to embrace healthier eating choices. Also, as a potential takeover target, WhiteWave Foods Co (NYSE:WWAV) would almost certainly be worth more to one of the giants trying to buy into a trend than the $17 or so that shares are currently trading for.
Either way, WhiteWave should reward its investors much better than an investment in Dean Foods before the spin-off.
The article Buying a Part of This Food Company May Be Better Than the Whole originally appeared on Fool.com is written by Matthew Frankel.
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