NEW YORK (TheStreet) –- With a year-to-date gain of 18.4%, according to research firm Morningstar, the packaged food sector, which includes companies such as ConAgra Foods (CAG) and General Mills (GIS) , has outperformed the broader market. The question is, will that continue next year?
One theory is that the packaged-food industry will continue to benefit from the drop in oil prices, which has left consumers with more money to spend on food. But investors should look more closely at individual companies; not all will benefit from lower gasoline prices. More specifically, investors should look at measures such as profit margins and return on equity -- which measures how much money a company makes in relation to the amount shareholders invest -- to determine the potential of a given stock.
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Take for instance Post Holdings (POST) , whose shares are down 17% in 2014. The company has struggled to compete with Kellogg (K) , which is more diversified. Post has the worst return on equity in the packaged-food industry, a sign that the company is struggling to grow.
In contrast, General Mills has diversified. In September, it announced it agreed to buy Annies (BNNY) , a maker of natural foods. The deal shows that General Mills, whose sales and profits are declining, is adapting to consumers' shift toward eating healthier and more natural foods, making it a turnaround candidate for 2015. Its stock is up 4.2% for the year, but that trails the 9.6% gain of the Standard & Poor's 500 Index. Furthermore, the company's shares have fallen 2.3% during the past three months, while the stock market has hit record highs.
Finally, Pinnacle Foods (PF) , whose shares have gained 25% so far this year, should continue to do well next year. The company, whose brands include Birds Eye and Duncan Hines, holds the No. 1 or No. 2 market position in 10 of 13 grocery categories that it competes in. In its most recent quarter, its earnings rose 17% and its gross profit margin increased 4.1%. Pinnacle's profit and margins should keep growing as the company continues its cost-cutting program.
This article represents the opinion of a contributor and not necessarily that of TheStreet or its editorial staff.
TheStreet Ratings team rates GENERAL MILLS INC as a Buy with a ratings score of B+. TheStreet Ratings Team has this to say about their recommendation:
"We rate GENERAL MILLS INC (GIS) a BUY. This is driven by a few notable strengths, which we believe should have a greater impact than any weaknesses, and should give investors a better performance opportunity than most stocks we cover. The company's strengths can be seen in multiple areas, such as its notable return on equity and expanding profit margins. We feel these strengths outweigh the fact that the company has had sub par growth in net income."
You can view the full analysis from the report here: GIS Ratings Report