Major U.S. food companies are fighting a tough battle as easy-to-prepare and ready-to-eat convenience foods are gradually losing sheen. Consumers would earlier take decisions based on taste, price and convenience. However, the scenario is fast changing, as they are becoming increasingly vigilant toward a new set of factors which are upsetting the consumer value equation, thus creating challenges for the food industry.

Trends that have gathered steam in the U.S. in recent years include a shift toward healthier options in the food sector (predominantly fresh foods) and a high level of price consciousness. Additionally, factors such as growing awareness of "clean label" and genetically modified organism or GMOs, increasing concerns related to sugar consumption and growing demand for free-from products are also sketching the food landscape afresh.

This seismic shift in the U.S. food industry is creating hurdles for food behemoths such as General Mills Inc. (GIS - Free Report) , Kellogg Company (K - Free Report) , Mondelez International, Inc. (MDLZ - Free Report) , The Kraft Heinz Company (KHC - Free Report) , and others, thus making it harder for legacy brands to improve sales.

These trends are unlikely to stop. That said, despite all these negatives, there are ample reasons to be optimistic about the future in the food industry.

Healthy/Organic Food Drive to Boost Sales

Food majors are aggressively trying to improve their products through innovations as well as strategic acquisitions and divestitures. Additionally, they are channeling funds toward product and packaging innovation as well as reformulating a number of existing products to meet the rapidly changing consumer view on health and wellness.

Given the scenario, demand for organic food continues to grow in the country. Per the recently released report from Organic Trade Associations (OTAs) 2017 Organic Industry Survey, the American organic sector stayed on its upward trajectory in 2016, gaining new market share and crushing records, as consumers across the country ate more organic products than ever before.

Total organic sales were $47 billion in 2016 in the U.S., reflecting new sales of nearly $3.7 billion. This comprised $43 billion of organic food sales, the first time the American organic food market has broken the $40-billion mark. Organic food sales increased 8.4% from 2016, significantly surpassing the stagnant 0.6% growth rate in the overall food market. Sales of organic non-food products increased 8.8% in 2016, outstripping the overall non-food growth rate of 0.8%.

This growth trend is expected to accelerate in the coming years as food makers are going all out to boost the supply of organic ingredients, as well as increase investment in infrastructure and education.

Apart from innovations and the drive toward organic ingredients, companies are also pursuing a spate of multi-year restructuring initiatives with focus on improving operational efficiency to generate cost savings and supporting its key growth strategies. For example, Kraft Heinz has implemented many cost-saving initiatives including the integration of Kraft Foods and Heinz. The company plans to save $1.7 billion in annual costs by the end of 2017 (up from $1.5 billion earlier expected), primarily focused on work-force reductions along with factory closures and consolidations. As of first quarter 2017, the company realized cumulative savings of approximately $1.3 billion.

Though the companies sales have been relatively soft, cost savings have led to better margins. Again, savings are being re-invested in the business for innovation, brand building and marketing to stimulate top-line growth.

Stocks to Bet on

Given the positive momentum, we may zero in on some food stocks that have gained in the current scenario and have the potential to further grow. Moreover, the stocks have been witnessing an uptrend in earnings estimate revisions and have outperformed the Zacks classified Food-Miscellaneous/Diversified industry in the last one year. With the help of the Zacks Stock Screener, we have handpicked five stocks from the industry based on a favorable Zacks Rank and other relevant metrics. You can see the complete list of todays Zacks #1 Rank (Strong Buy) stocks here.

Performance of Food-Miscellaneous /Diversified Industry vs. Stock Picks

SunOpta Inc. (STKL - Free Report) is an operator of high-growth ethical businesses, focusing on integrated business models in the natural and organic food, supplements and health and beauty markets. We remain optimistic about this Zacks Rank #1 company. Interestingly, in the last one year, the stock surged more than 97%, outperforming the 0.4% loss of the industry. The company is expected to grow 15% in the next five years, faring a lot better than the industrys average of 10.2%.

ARAMARK Holdings Corporation (ARMK - Free Report) offers food services, facilities management, uniform and career apparel to health care institutions, universities, school districts, stadiums and businesses. This Zacks Rank #2 (Buy) stock has climbed 16.3% in the last one year against the industrys weak performance. The stock has a trailing 12-month ROE of 19.13% compared with the industry average of 11.27%. It has a VGM style score of A and a 35 year expected growth rate of 12.8% (higher than the industry).

Lamb Weston Holdings, Inc. (LW - Free Report) is a supplier of frozen potato, sweet potato, appetizer and vegetable products to restaurants and retailers. On Nov 10, 2016, Lamb Weston completed the previously announced spin-off from Conagra Brands Inc. (formerly ConAgra Foods Inc.). On the same day, the company's stock began trading on the New York Stock Exchange under the ticker symbol "LW". This Zacks Rank #2 stock has rallied 58.3% since it started trading, surpassing the industrys weak 5.8% growth. It has a dividend yield of 1.62%, higher than the industry average of 0.22%.

MGP Ingredients, Inc. (MGPI - Free Report) produces and markets ingredients and distillery products to the packaged goods industry. The stock holds a Zacks Rank #2 and increased 53.7% in the said period. The company is expected to grow 15% in the next five years, faring a lot better than the industrys average. Its trailing 12-month ROE is currently pegged at 22.54%, a lot better than the industry one. The company surpassed earnings estimates in three of the last four quarters, resulting in an average beat of 27.09%.

McCormick & Company, Incorporated (MKC - Free Report) is engaged in manufacturing, marketing and distributing spices, seasoning mixes, condiments and other flavorful products to the food industry. The company has raised its dividend annually for 30 years consecutively. The stock returned 7.1% in the last one year, outperforming the industrys performance. The stock has a trailing 12-month ROE of 28.03%, a lot higher than the industrys 11.27% level.

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Excerpt from:

5 Food Stocks for Healthy Gains on Organic Food Trend - Zacks.com