Bye, bye Red No. 3. The Food and Drug Administration's decision Wednesday to ban the cherry-red synthetic dye could be the first of many announcements that will send food manufacturers scrambling to revamp products in the months to come, adding pressure to stocks in an already beaten up sector. "Whether justified or not, we believe renewed consumer attention on the role of processed foods in the public health crisis is just getting started. It is hard to see how the big food companies, who have put so much effort into convenience, indulgence and cost, come out looking good under the heightened scrutiny," Robert Moskow, an analyst at TD Cowen, wrote on Thursday. Donald Trump has named vaccine skeptic Robert F. Kennedy Jr. as his pick to lead the Department of Health & Human Services . If approved by the Senate, Kennedy will have oversight of key health and social services organizations and influence health policy and food regulations. He is a critic of processed foods laden with additives, as well as seed oils and fluoridated water. Although some of his opinions remain highly controversial, his stance on processed food appears to be gaining momentum, with louder calls to "Make America Healthy Again." How Kennedy would prioritize his agenda is unclear, but food industry analysts expect pressure to increase on the sector, which is already wrestling with slow growth, crimped consumer budgets and changing dietary habits. Investors must pick stocks that are nimble enough to adapt or already sell more nutritious products. Moskow anticipates it will be "relatively easy" to remove Red No. 3 from foods, and expects any added cost will be offset elsewhere. This playbook can be repeated if other bans surface. However, the analyst expects the bigger threat is that MAHA initiatives will increase, fanning consumer distrust, and "potentially erode brand values." A tough two years Food stocks are coming off the worst two-year stretch of underperformance versus the S & P 500 since 2017-2018. However, with the stocks at a hefty discount to the broad-based index on a price-to-earnings basis, a bounce back is possible. "Following the two years of 2017-2018, Food stocks rallied 27% in 2019 as volume trends stabilized and negative earnings revisions diminished," Evercore ISI analyst David Palmer wrote in a recent note to clients. "Heading into 2025, we recognize the potential for stabilizing volume as the consumer adjusts to COVID-era inflation and trends lap pre-election inflation pushback." Palmer's top picks are Post , Mondelez and BellRing Brands . But he's still cautious as the sector's multiyear trend suggests organic sales in North America could average a 3% decline in the first quarter, and they could see a 1% drop in the second. Big national food brands are losing market share to private label as consumers look to stretch their budgets. He said sales of store brands rose about 4% to 5% from 2023 to 2024. That's why BellRing, the maker of Premier Protein shakes, stands out. It's seeing double-digit sales growth. In November, the company forecast fiscal 2025 revenue growth of 12% to 16% to a range of $2.24 billion to $2.32 billion. That should continue as the brand's household penetration is just 19%. As distribution broadens and ad spending rises, awareness should grow, further boosting sales, analysts say. Impact from GLP-1 drugs Rising use of obesity treatments could be a positive catalysts for companies like BellRing. Protein shakes have been touted as a good option for people trying to shed pounds, especially those taking appetite-suppressing GLP-1 medications like Wegovy and Zepbound. These patients are encouraged to keep up protein consumption to stave off a loss of muscle mass. Three-quarters of the analysts that follow BellRing rate the stock strong buy or overweight, according to FactSet. With an average price target of $84.14, shares could rise 16% from Friday's close. In 2024, shares rose 36%. BRBR 1Y mountain Bellring Brands stock over the past year. Bernstein analyst Alexia Howard said the food sector's cheap valuations could tempt investors, but they will need to overcome fears of a sales hit from GLP-1 drugs or avoidance of heavily processed food. There are early signs consumers are adjusting their behavior due to the increased attention to potential links between food choices and chronic health conditions associated with "MAHA." She cited a heightened focus being paid to heavy metal content in some foods and rising fears about plasticizers and microplastics that could be transferred to food via packaging as examples. As for GLP-1 drugs, the biggest impact won't surface immediately, she said. Bernstein estimates 15% of U.S. adults will use the medications within the next four to five years, reducing calorie consumption by about 1% per year over the next few years. That said, there will be "a disproportionate impact" on packaged food, especially sweet and salty snacks, Howard said. Howard's top picks tend to have a healthier profile. They include Atkins and Quest brand owner Simply Good Foods, leading organic and natural foods maker Hain Celestial and ingredients giant McCormick . MKC 1Y mountain McCormick & Co. shares over the past year Evercore noted that shares of McCormick, which tend to benefit when more people cook at home, ended 2024 up 11% from the prior year, making it the only large-cap food stock in the firm's coverage that traded positive year over year. But Wall Street's opinion on the stock is more mixed, with a little more than a third of analysts rating it a buy or overweight, according to FactSet. Most consider it a hold, but the average analyst price target of $85.65 suggests shares could rise nearly 17% over the next year. Having the right products The desire to have the product mix could encourage more mergers and acquisitions. Take Campbell's acquisition of Sovos, the owner of Rao's, in March . Fans of the fast-growing tomato sauce brand like that it's made without added sugar. Like many other healthier options, Rao's is priced at a premium to brands like Prego, which Campbell's also owns. Consumers are increasingly falling into one of two groups, Rob Dongoski, a partner and global lead in Kearney's food and agribusiness practice told CNBC. There's a growing group of "folks who care about what they eat and are willing and able to pay for it," he said. And there's another who won't change their habits due to the constraints of their budget or a lack of interest. "Food companies that are successful in the future, carve out their niche," he said. "They figure out, can I serve both, or am I going to double down on one versus the other. I think that is key." He expects big food companies to make that call, and look at their portfolio to either reformulate brands to fit the strategy or go out and make acquisitions to do so. Activist investors could also encourage more deal-making, according to Bernstein's Howard. "There is also the broader question of whether activists could push for larger scale consolidation across the space, perhaps to try and finish up what 3G started when they merged Kraft with Heinz back in 2015," Howard said. She noted there are numerous combinations that could make sense, as the deals would allow companies to cut costs and boost negotiating leverage with retailers. Howard sees Simply Good Foods, with its nutrition bars and protein shakes, as "the most likely takeout candidate" within her coverage. SMPL 1Y mountain Simply Good Foods shares over the past year The majority of analysts rate Simply Good a buy or overweight, with the average price target of $40.90, which would provide more than 20% upside over the next year. But the stock's performance has been weak. It ended 2024 lower and has already fallen 13% in the first weeks of 2025. The company has been hurt by poor performance at its Atkins weight management brand, but there are signs of a turnaround due to new products and advertising. Plus, the company recently acquired Owyn, a plant-based protein shake, that should boost sales growth. 'Secure (not stretched) dividends' For those who decide to invest in food stocks, pay attention to dividends. Savita Subramanian, Bank of America's equity and quant strategist, said Thursday that if investors believe the market has entered a "total return world," then the contribution of dividends in one's portfolio becomes more important because "lofty" returns on stock prices could become more rare. "We advise investors to seek out companies with above-market and secure (not stretched) dividend yields," she wrote in a research note on Thursday. Many food stocks fit the bill, including General Mills , Hormel , Campbell's, PepsiCo and Tyson Foods . According to Subramanian, the group fits into a "buy low, sell high" valuation discipline, where stock price appreciation could potentially outpace the dividend growth. "Since 1990, Value has led in Recoveries (Low P/E stocks outperformed 100% of the time) and Quality ([Return on Equity]) in Downturns," she wrote. "A combination could lead in 2025, but inexpensive quality is scarce — the valuation of high and low quality stocks are now neck-and-neck after two decades of high quality trading at a discount."
