My 3 Favorite Stocks in this Overlooked Industry

By (David Goodboy),

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The Smiths' vegan front man Morrissey may have crooned, "Meat is murder!" but the fact remains that meat is big business.

Take a look at figures from the U.N. Food and Agriculture Organization, which projected a 5% annual growth rate of the poultrymarket in most countries until 2015.

And in 2012, meat production climbed to more than 300 million tons, according to the same report. That's alot of chickens. No wonder Morrissey and the other vegans are upset.

As you can imagine, meat companies have historically made solidinvestments . But the opportunity toprofit hasn't passed. I've come across threestocks in this industry worth considering, with one standing out as my favorite.

1. Hormel Foods ( HRL )
This dividend-paying, food-making dynamo has paid dividends for the past 47 years.

The company specializes in the production and marketing of various food and meat products, including Spam and Country Crock. The Januaryacquisition of Skippy peanut butter expands Hormel's product offerings into another kitchen staple.

My colleague Jay Peroni recently profiled thestock here. He pointed out thatshares are higher by 177% during the past seven years and cited the company's strong financial picture as the reason for the impressive growth.

Theearnings before interest,taxes ,depreciation andamortization have interest expense covered by nearly 70 times as of the end of 2012, and its forward price-to-earnings (P/E ) ratio is a healthy 17, compared to the sector's average of 27. A lower P/E often signals a stock that isundervalued in relation to its peers. Add in operating margins of approximately 10%, and it creates a compelling case for this meat stock.

The weekly chart shows the stock broke out of a base of $28 a share range in October 2012. The stock has since rallied to just above $40.

 2. Tyson Foods ( TSN )
This nearly $9 billionmarket cap meat producer distributes and markets chicken, beef, pork and related items globally. It has an excellent P/E ratio of 14.77 and a quarterlygross profit margin of just above 6%. A price-to-earnings growth (PEG ) ratio close to 8 and a trailing 12-month income of $600 million has powered shares to a 100%gain since August 2012. But technically, it appears the stock has hitresistance at just above $24 a share. I would await a pullback before purchasing shares.

3. Smithfield Foods ( SFD )
While both stocks paint a compelling picture for a long-terminvestment , there's another stock in the meat sector that has my vote as the ideal immediate investment: Smithfield Foods.

This stock has lagged behind Tyson and Hormel until its third-quarter earnings release on March 7; shares soared 11% after announcingearnings per share ( EPS ) of 44 cents, beating estimates of 39 cents a share. A possible split the company's divisions was also mentioned in the earnings conferencecall , fueling the speculative move higher.

Smithfield shareholder Continental Grain issued a letter explaining the logic behind a possible corporate split. Shares rallied close to another 5% on the news.

Shareholders expect Smithfield to split into three businesses: pork and packaged meat, hog farms, and another that specializes in international business.

It is argued that this potential breakupwill boost returns by dropping the unprofitable hog-raising business. Someanalysts estimate a split could lift the stock 50% to $48 a share.

But President andCEO C. Larry Pope is against a breakup. Smithfield points out that the fiscal third quarter earnings jumped to almost $82 million despite the losses at its hog farms. He says the hog farms provide a competitive advantage that would be lost should the company be broken up. In addition, he thinks things are improving at the hog farms and they should soon be adding to thebottom line . I don't think he will be able to withstand the shareholder pressure. Therefore, Smithfield looks like a great speculative entry right now. Technically, the stock has pulled back from its high, creating an opportunity.

Risks to Consider: Smithfield Foods is a speculative buy due to the fact that quick additionalupside is dependent upon the breakup of the company. I firmly think it will occur, but no one knows for certain. Tyson and Hormel are strong stocks, but their prices may be overextended.

Action to Take --> Smithfield Foods is my favorite of the three stocks because it is in play right now and has a favorable technical picture. My 18-month target on the stock is $42.

The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.

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This article appears in: Investing , Investing Ideas , Stocks
Referenced Stocks: EPS , HRL , SFD , TSN

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