Regular readers know that my investment bias here is toward large-cap companies with demonstrated business models and a competitive advantage in established markets, preferably with a favorable, global trend as a support. And when you can combine these traits with defensive stock qualities, you're two steps ahead, which is why cereal giant Kellogg (NYSE: K) is worth a review. The market sell-off and tumult of 2008 spared almost no stocks, and Kellogg took a beating as well, with investors driving shares down to the $35-range from $60.
Still, the over-riding theme with this business model is that plenty of opportunities remain for Kellogg to generate decent growth beginning in the second half of 2009. Kellogg should benefit from more 'frugal consumer' Americans eating breakfast at home, although there is some risk of sales attrition, due to the rise of generic substitutes.
Meanwhile, Kellogg's overall cost reduction efforts are succeeding; ingredient costs, while not low, are not likely to increase at above-trend rates registered earlier in the decade. There's likely to be a small 3-6 cent per share charge in F2009 for a peanut-related recall, but other than that, K is well-positioned for the economic recovery, both domestically and internationally, with some iconic brands. The First Call F2009 / F2010 EPS estimates for K are $3.06 / $3.34.
Stock Analysis: Kellogg is a moderate-risk stock. Consider buying a 25% position in Kellogg now; then buy another 25% in three months. Under any circumstance, don't buy more than 50% of your K position in the first half of 2009. Sell / Stop Loss if you were to buy shares in this company: $27.
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Disclosure: Lazzaro has no positions in stocks, but does own shares in two Pimco Bond Funds: PHDAX and PYMAX.
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