Here's a Nominee For Worst Analyst Call of 2013
Being a Wall Street analyst is tough work. Those analysts that have the temerity to make truly bold calls, such as calling a top in the banking sector in 2007, are often vilified and treated as though they are wearing scarlet letters.
Likewise, those analysts that predicted events such as Apple (NASDAQ: AAPL) going to $800, $900 or $1,000 (the stock is now around $450), have likely dealt with their fair share of criticism. Again, being an analyst is not the easiest job in the world. No one bats .1000, but some calls can really miss the mark and prove to be far worse than others.
To this point in 2013, one analyst call really stands out, and to the surprise of some, it does not involve an overtly bullish prediction on Apple. Rather, it involves sleepy General Mills (NYSE: GIS). Actually, the maker of Cheerios and Pillsbury Toaster Strudels, among other popular brands, has been anything but sleepy this year.
And it is pure and simple price action that makes the January 11 call from Goldman Sachs (NYSE: GS) to sell General Mills (a downgrade from Neutral) look particularly bad. Since the day that note was published, shares of Big G have surged 14.3 percent and that EXCLUDES Wednesday's nearly three percent pop on the back of a strong fiscal third-quarter earnings report.
Making matters worse, Goldman placed a $40 12-month price target on General Mills. The shares are flirting with $48 today. Said another way, to make Goldman's price target accurate by January 11, 2014, a stock with a beta of just 0.17 needs to fall nearly 17 percent in 10 months.
"We believe GIS has a product cycle issue with a US retail portfolio that appears over-extended. We believe either retailer- or manufacturer-led pruning is inevitable and likely to result in continued share losses," according to the Goldman note.
Yes, General Mills has previously raised prices to deal with higher commodities costs. And yes, there will always be cost-conscious consumers that balk at such price increases, particularly when most grocery stores carry an array of generic equivalents to General Mills brands.
Then again, commodities costs and access to generic brands is not solely a General Mills problem. Common sense dictates such a scenario affects Coca-Cola (NYSE: KO), Kellogg (NYSE: K), Kraft (NASDAQ: KRFT), PepsiCo (NYSE: PEP) and scores of other marquee brands.
Arguably, the Goldman call assumes a particularly gloomy economic scenario where the U.S. consumer passes over major brands in favor of private labels to save a few bucks. However, the recent spate of U.S. economic data indicate the consumer is, at the very least, recovering and feeling a bit more ebullient today than he or she was two or three years ago.
On a related note, investors should note General Mills held up relatively well during the financial crisis. The shares dropped just 12.8 percent from December 31, 2007 through the market bottom on March 9, 2009.
In other words, even if the "Global Financial Crisis Part II" starts tomorrow, it is a stretch that Goldman's call on General Mills will prove accurate. Remember something else about General Mills and its ability to weather economic storms: From the first quarter of 2008 through second quarter of 2009 the company raised its dividend not once, not twice, but three times.
"We expect the stock's valuation metrics to revert back to the low end of its recent range given persistent fundamental disappointment," Goldman said in the note.
It is kind of hard to call General Mills a "persistent fundamental disappointment." The company has raised its dividend seven times since early 2008 and that does NOT include the recent announcement about the 15 percent payout increase coming later this year.
Calling a stock that has made a consistent series of new all-time highs in 2013 a "persistent fundamental disappointment" is, well, wrong. General Mills is a value stock. Over time, the bulk of its positive (and negative) price action will be accrued by virtue of its fundamentals.
Of course with the stock trading at nearly 16 times forward earnings, one could call it expensive. Perhaps it is. In reality, the broader consumer staples sector is richly valued, indicating investors have been willing to pay up to play some defense.
That notion exposes another critical flaw in Goldman's call on General Mills. Many investors have been leery of the broader market rally, but they do not want to be left out. Logically speaking, where is the investor that needs some cajoling to get in the game going to turn? To Netflix (NASDAQ: NFLX) with a trailing P/E north of 600 or to a stock like General Mills?
Alright, so plenty of investors have embraced Netflix as evidenced by recent share price appreciation, but the point is sectors drive the market, not the other way around. As difficult as it may be for some to believe, the Consumer Staples Select Sector SPDR (NYSE: XLP), of which General Mills is a member, is up more than eight percent year-to-date.
The Technology Select Sector SPDR (NYSE: XLK) is up barely more than one percent. That is to say stodgy staples have been a leadership group in 2013, something Goldman clearly did not see coming, at least not as it pertained to General Mills.
In summation, investors that heeded Goldman's advice to sell General Mills have missed out on the following: A pop in the stock on speculation it could be Warren Buffett's next "elephant," the announcement of a 15 percent dividend increase, today's almost three percent earnings-induced gain, a long string of fresh all-time highs and a total return of 14.3 percent since January 11.
Again, that excludes today's gain and even when excluding Wednesday's action, General Mills has outperformed the SPDR S&P 500 by nearly 900 basis points since January 11.
Latest Ratings for GIS
|Jan 2015||Bank of America||Downgrades||Neutral||Underperform|
|Nov 2014||JP Morgan||Maintains||Neutral|
|Nov 2014||RBC Capital||Downgrades||Outperform||Sector Perform|
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