The thesis is simple: Americans are cutting back to save money, so they’re passing on named brands and opting for generics. You’d assume then that makers of this private-label food would make for good investments. But that hasn’t been the case.
Ralcorp Holdings , which Cramer called a buy at $67 and change back on Sept. 19, has dropped 11 points since then. And that’s despite an overall upward trend in private-label sales. For the 52 weeks ending on Nov. 1, private-label sales jumped 10% compared to 3% for name brands. And management at Costco, Kroger, Safeway and Supervalu all attest to the strength of these lower-cost products.
So what’s the problem? Cramer said that, unlike other food-and-beverage names, private-label stocks aren’t associated with safety. They don’t pay dividends, either, and they’re big on M&A. So in a market as tenuous as this one, Wall Street doesn’t want to bank on companies with big debt positions.
But Cramer said that investors will come around once they realize how much growth is in private labels. And with the downside already priced into these stocks, it seems like there’s less risk than people think – and more chance for profit.
Cramer is sticking with Ralcorp as his pick for the sector. Ralcorp has its hands in private labels, but is moving into name brands as well with its recent purchase of Kraft’s Post cereals. This gives the company a chance to make money as consumers trade down, but also as lower gas prices free up cash for favorite foods.
But don’t count out TreeHouse Foods, either. While THS carries more debt, Cramer said he was withholding judgment on the stock until he interviewed CEO Sam Reed. Click here for that video.
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