In Troubled Times, Stick With Food & Beverage Stocks

In troubled times, stick with Food & Beverage stocks in the natural products industry, say our Natural Business Composite Index (NBCI) Forum analysts.

There is unanimous agreement that for 4Q01 the Food & Beverage subsector of the NBCI will outperform the broader Russell 2000 Index of small cap stocks.

The impact on Wall Street of the horrific events of Sept. 11 manifested itself in a wave of what can only be described as panic selling that sent the stock market on the worst single-week downturn in its history. Despite the lows, however, every subsector of the NBCI outperformed the Russell 2000 for the third quarter.

The Russell began 3Q01 at about 498. On Sept. 18, it closed the trading day at 411.66, down about 21 percent for the quarter. For the same period, the NBCI Food & Beverage subsector lost 10.2 percent and Retail & Distribution lost 17.6 percent. Botanicals & Supplements actually gained 2.6 percent, and Consumer & Personal Care turned in the best performance, gaining 7.5 percent.

Kudos go to two of our Outlook Forum members for getting it at least partially right. Tucker Anthony Sutro Capital Markets Senior VP Carole Buyers was the only one of the team to predict that Botanicals & Supplements would outperform the Russell, and Salomon Smith Barney VP Greg Badishkanian predicted the Consumer & Personal Care subsector would outperform the broader index. The rest of our Forum members’ predictions fell victim to the free-falling market.

All of our Outlook Forum analysts believe that, in light of the Sept. 11 terrorist attacks on New York and Washington and the uncertainty surrounding what actions will be taken by the U.S. government and when, natural products stocks in general provide relatively safe havens for investors.

“We believe the natural products industry is fairly defensive and should not be impacted in a meaningful way from the terrorist attacks or a potential economic downturn,” Badishkanian says. “However, we believe that the natural foods and nutritional supplements segments are the most defensive segments. In addition, high-end natural foods retailers, like Whole Foods, could benefit as consumers trade down from restaurants to high-quality prepared foods.”

Badishkanian says he doesn’t expect industry margins to shrink, either. He suggests that while all natural foods companies would be impacted by increased oil prices, those prices currently are at pre-Sept. 11 levels, and both Saudi Arabia and Venezuela have hinted at ensuring ample oil supplies. “Also, we would not anticipate other costs of doing business, such as increased security within the airline business, to impact the natural foods industry,” he says.

Adams, Harkness & Hill analyst Scott Van Winkle notes that while the events of Sept. 11 have negatively affected consumer spending and likely will continue to do so, most segments of the NBCI represent non-discretionary purchases. “They should therefore see a lessened impact from the fallout of the terrorist events,” he says.

Buyers agrees that industry stocks on the whole offer a fairly defensive play but adds that they have for several months. She points out that natural products stocks were already performing well relative to other stocks during the downturn of the last two quarters—before the events of Sept. 11. Buyers cautions, however, that predicting the market in the days to come will be an imperfect art at best.

“We’ve never been here before,” she says. “We believe the focus should be on defensiveness and valuation. Companies that went into this with higher valuations will have a higher roof to fall from.”