In most cases, companies like General Mills (NYSE:GIS) tend to act on the sidelines. While the consumer goods giant is an important cog in the broader economy, it doesn’t deliver the deep innovation that typifies tech startups. Instead, General Mills helps feed the world (usually at breakfast), which isn’t an enticing narrative. So if institutional investors are mustering it, it’s worth investigating why. I’m bullish on GIS stocks.
At first glance, General Mills doesn’t appear to be anything special. For now, TipRanks notes that GIS stock carries a consensus Hold rating. Out of 14 analysts covering the underlying company, only two gave the stock a “buy” rating. To be fair, bloggers’ opinions are on more optimistic ground. Still, many financial writers don’t have much in play, which clouds the framework somewhat.
However, when you look at the charts, GIS stock suddenly seems a lot more intriguing. Shares are up nearly 33% year-to-date. To compare the benchmark S&P 500 (SPX) index fell by almost 17% over the same period. While this is a decidedly positive development for General Mills stakeholders, it may not bode well for the underlying economy.
Let’s face reality: when investors anticipate rough times, they won’t bid on speculative or purely growth-oriented names.
The personal savings rate slipped to 2.3% in October this year, data from the US Bureau of Economic Analysis shows. This is a low not seen since July 2005. As the Federal Reserve continues to hike interest rates to combat skyrocketing inflation, conditions are sounding rough for the discretionary consumer segment.
Right now, the focus is on saving money and getting through the choppy economic waters. Cynically, this is helping GIS stocks, but at the expense of other asset classes.
Hedge funds are getting into GIS stocks
Aside from the external fundamentals that underpin GIS stock, it’s intriguing that Wall Street has been keen to boost its valuation. Yes, General Mills is up about 12% over the past month, an impressive tally, especially given the circumstances. Even hedge funds are increasingly finding a position in GIS to be a good idea.
In the second quarter of last year, hedge funds collectively owned nearly 1.99 million shares of GIS. By the third quarter of this year, that number rose to 3.03 million shares, or a 52.44% increase. To be fair, these institutional players reduced exposure to GIS shares by 214,100 shares between Q2 and Q3. This is why the trust signal pings negatively. Nonetheless, the broader trend is positive and consistent with increasing bullish sentiment at General Mills in the open market.
The uptick in hedge fund sentiment is inherently attracting attention due to the information and resource gap. While many individual retail investors do very well for themselves, market participants, on average, do better with better information.
With hedge funds, you have access to the best analysts and the best research. They live and breathe the market dynamics and get paid to know what’s about to happen before the rest of the crowd does. Otherwise nobody pays money for the privilege of losing.
It’s this framework that makes GIS stocks so compelling. It’s not just about General Mills itself or the consumer staples segment. Rather, hedge funds enjoy numerous other ways to place their bets. Their choice of GIS raises deeper questions.
Additionally, options traders are also recognizing the potential upside opportunity in GIS stocks. Earlier this week, traders bought 12,363 call options on General Mills. This increase represented a move of about 196% compared to the typical volume of 4,176 call options.
Is GIS Stock a Buy According to Analysts?
As for Wall Street, GIS stock has a consensus Hold rating based on two Buy, eleven Hold, and two Sell ratings. The average GIS price target is $80.87, which represents a 7% downside potential.
The fundamentals should make General Mills worthwhile
In the spirit of total transparency, GIS stock may not initially appeal to some investors because of its value proposition. A case can be made that his premium is too high. However, the overarching fundamentals should make this investment palatable over the long term.
Notably, the market cites GIS at 18.3x trailing 12 month (TTM) gains. That’s a bit on the “wrong” end of the industry median of 17.6x. In addition, GIS has a 21.3x Forward Earnings Multiple. Here the sector median is 15.7x. So on paper, investors certainly have access to cheaper opportunities.
However, interested parties should not ignore the quality of the business. For example, General Mills’ net margin (on a TTM basis) is over 15%. That scores better than 89.5% of the competition. Additionally, the company’s return on equity is close to 29%, indicating a superior ability to convert equity funding into earnings.
In the future, the consumer can be tapped. Yes, many economists believe Americans are still sitting on trillions of dollars worth of pandemic savings. However, with credit card debt skyrocketing to all-time highs, it’s hard to imagine why wealthy consumers would take on such debt in the first place.
Still, people need to eat, and it’s this cynical reality that should keep GIS stocks in the game while other retail games suffer.