THE LAST SHALL BE FIRST

NEW YORK -- Food stocks reflected an anomaly during the first half of the year -- one that is unlikely to continue through the balance of 2001, securities analysts told SN.In a break with historic patterns, stocks for companies with strong operating results showed weak selling performance, while stocks for several companies with traditionally weaker results outperformed the market and the food sector

NEW YORK -- Food stocks reflected an anomaly during the first half of the year -- one that is unlikely to continue through the balance of 2001, securities analysts told SN.

In a break with historic patterns, stocks for companies with strong operating results showed weak selling performance, while stocks for several companies with traditionally weaker results outperformed the market and the food sector during the half.

Consequently, value stocks like Fleming, Spartan Stores, Wild Oats, A&P, Winn-Dixie and others showed the most upward movement on price during the first half, while historical growth stocks like Safeway, Kroger and Wal-Mart declined during the same period.

"The overall theme during the half was that the market perceived the weaker cap companies with washed-out value as turnaround candidates, and they were the ones that did well," Jack Murphy, an analyst with Credit Suisse First Boston here, told SN.

"This appears to be a unique situation because it's not part of the normal cycle for stocks of companies with operating challenges to perform so well. But most of that performance was probably based on the excitement of turnarounds being accomplished, or promised, by each individual company and not on any long-term trend."

Jonathan Ziegler, San Francisco-based managing director for Deutsche Banc Alex. Brown here, also said the performance of smaller cap stocks reflected, to a large degree, management promises of stronger operating results moving forward. "The market is cyclical, and right now small cap stocks are in vogue after investors were burned by Internet and high-tech stocks," Ziegler said, "though my expectation is we will begin to see the bigger cap names begin to look better to investors."

Chuck Cerankosky, an analyst with McDonald Investments, Cleveland, said investors definitely seemed to be turning "to an unusually high degree" to stocks that had been traditionally underperforming the market "both because their prices were at fairly depressed levels when the year began and, in some cases, as a reaction to positive news."

During the first half of 2001, food stocks as a group performed in between the two primary market indices, with the SN Composite Index of 37 retailers, wholesalers and e-commerce stocks falling 3.1%, compared with drops of 2.6% and 7.3%, respectively, for the Dow Jones Industrial Index and the S&P 500.

That negative performance was an improvement over the second half of 2000, when the SN Composite fell 14.1% -- a six-month period in which investors generally favored stocks whose companies had strong operating results.

The stock results for the first half also had more winners than the prior six months, with 24 stocks showing gains and 13 showing declines, compared with 15 gainers and 22 losers in the prior six months.

Ziegler said the performance of food stocks as a group reflected investors' belief that the economy will be stronger, "which means people are lightening up on nondurable consumer stocks. And as food stocks have gotten very inexpensive over the past six months, the market is beginning to see them again as a good long-term investment."

According to Cerankosky, food stocks in general had a difficult time during the first half of the year. "Money was flowing into food-sector stocks at the end of 2000 because the public liked their defensive characteristics after disappointments at the beginning of the year with Internet and high-tech stocks.

"But when the Federal Reserve lowered interest rates a half point on Jan. 3, it caused a rotation out of the food sector -- and we saw that in-and-out movement repeatedly throughout the first half each time the Fed lowered interest rates further."

Looking ahead, Cerankosky said investors are likely to put a very intense focus, during the second half, on actual earnings generated "to see if their investment expectations are borne out in actual results. Those numbers must come in at levels investors are forecasting, or else there'll be major disappointments on a stock-by-stock basis."

Murphy said he expects food stocks, particularly the name stocks, to continue to decline during the balance of the year "because investors perceive that same-store sales are under pressure, and they see less opportunity for upgrading earnings."

Looking at some stocks individually, analysts' observations included the following:

FLEMING, Dallas, whose stock rose 202.2% during the half, compared with a gain of 15.2% in the second half of 2000.

Ziegler said the strong performance this year accelerated the gains in the prior six months "because management has communicated to the market that it is optimistic about the business it picked up from Kmart, and its guidance on earnings estimates is higher than the market had expected."

According to Murphy, "Fleming has benefited from the excitement of getting the Kmart contract that it used to split with Supervalu, and it looks like a clear addition to growth. And because Ron Burkle and Yucaipa Cos. have invested in Fleming, the market looks at Burkle's great track record [with previous investments in Ralphs, Fred Meyer and, ultimately, Kroger] and responds positively, including speculation that Burkle's investment in Kmart could mean some kind of cross-ownership of Fleming and Kmart in the future."

SPARTAN STORES, GRAND RAPIDS, MICH., whose stock was up 167.7%, compared with a drop of 46.4% in the second half of last year.

Cerankosky said Spartan's stock took an initial hit at the time it went public last August when its largest customer, D&W Food Stores, Grand Rapids Mich., left the cooperative and dumped its stock on the market. "But once investors saw the positive earnings Spartan was generating over several quarters, the stock rebounded, and the company is now attracting a decent investor audience. And as it has become more seasoned and shown good earnings, investment interest is growing."

WILD OATS, BOULDER, COLO., whose stock rose 144.9%, compared with a loss of 80.6% in last year's second half.

According to Ziegler, much of the increase in the stock price is based on Wild Oats' hiring of Perry Odak as president and chief executive officer during the half. "Investors saw how he cleaned up Ben & Jerry's prior to selling it to Unilever, and they suspect he has a similar turnaround plan for Wild Oats in preparation for selling it," he said.

A&P, MONTVALE, N.J., up 111.4%, compared with a price drop of 74.9% in the second half of 2000.

"A&P had really big earnings misses last year," Murphy said, "but as it moved into 2001 the company got a lot of attention, and investors bought the stock on the basis of the absolute value of the asset itself and the belief by some that there might be a takeout [sell-off] of the company."

PATHMARK STORES, CARTERET, N.J ., up 49.1%, compared with a gain of 38.2% in the prior six-month period.

Murphy said the stock-price increase was due to a combination of improved operating results "and speculation Pathmark will be purchased very soon, possibly within the calendar year."

WINN-DIXIE STORES, JACKSONVILLE, FLA., whose stock price rose 34.9% in the first half, compared with a decline of 19.1% in the second half of last year.

"Winn-Dixie management has been out there telling the story of the positive things it's doing -- including refinancing debt, cutting back on losing operations, remerchandising the stores, centralizing the buying process -- and investors are responding," Ziegler said.

According to Murphy, "Winn-Dixie has put together better operating numbers, particularly operating cash flow, for several quarters under Al Rowland [president and CEO], and to give the company credit, the better numbers -- excluding special charges -- do look a lot better. But once you get past those charges and the fact Winn-Dixie is closing store departments, it's doubtful there's going to be much left to grow earnings in a company operating in Wal-Mart Alley."

SMART & FINAL, LOS ANGELES, whose stock was up 29.4% in the half, compared with a 17.2% gain in the second half of last year.

"The market realizes signs of recovery there in both its institutional business and its retail operations," Ziegler said -- a reflection of improved results in Florida following a management change there and prospects for improved results in California following a similar change there.

PEAPOD, SKOKIE, ILL., a division of Ahold USA, Chantilly, Va., up 28.0%, compared with a drop of 90.9% in the second half of last year.

Murphy said the stock picked up "because of Ahold's investment, and the belief that investment will keep the company from going under."

SUPERVALU, MINNEAPOLIS., whose stock rose 26.5% in the first half, compared with a drop of 30.6% in last year's second half.

Ziegler said most of the increase came in the last few days of the first half, following strong first-quarter results. "The market is optimistic about the change in top leadership there [with Jeff Noddle moving up to CEO, succeeding Mike Wright, who continues as chairman] and about the way the company is rationalizing its operations following the loss of the Kmart business, as well as its ongoing expansion of Save-A-Lot," he said.

According to Murphy, "Supervalu's numbers haven't been great, but they are better than people expected. And in recent quarters, the numbers have stabilized and there's been a lot of investment because the stock is so cheap."

Cerankosky said Supervalu is attractive to investors "because it generates a good cash flow. And investors like the quality of management there and believe earnings will get back on a positive track by next year."

ALBERTSON'S, BOISE, IDAHO, whose stock was up 13.2% during the half, compared with a drop of 17.8% in the prior six-month period.

Ziegler said the upturn in the stock price is a result of the market reacting positively to the hiring of Larry Johnston, formerly of General Electric, as Albertson's new chairman and CEO.

Murphy explained that appointment boosted the stock "because investors believe Johnston will be able to fully complete the integration of American Stores and get the company back on the right track, based on his record as a good manager with an established track record at GE."

According to Cerankosky, a lot of investors have moved back into Albertson's since the start of the fiscal year "because they remember Albertson's as a top-quality food retailer and they want to own its stock."

KROGER CO., CINCINNATI, down 7.6% in the half, compared with a gain of 43.4% in the second half of 2000.

"It's a cyclical reaction, since the stock was so strong before," Ziegler said. "In addition, nothing much new has developed there, whereas some other companies are changing directions."

According to Murphy, Kroger stock performed well last year, "and it got a bit ahead of itself."

Cerankosky said he's puzzled by the poor stock performance "because Kroger had a good fourth quarter and first quarter. But the stock was hurt by the Jan. 3 interest-rate cut, though I think it will recover in the second half."

SAFEWAY, PLEASANTON, CALIF., down 23.2% for the half, compared with a gain of 74.8% in last year's second half.

Analysts agreed that geography is hurting Safeway, given the energy crisis in California -- where Safeway does 30% of its volume -- and the fact Albertson's said its results had improved in California, presumably in part at Safeway's expense.

WEBVAN, FOSTER CITY, CALIF., down 82.9% in the half, following a drop of 97.2% in the second half of 2000.

The Internet retailer last week ceased operations in all markets and announced its intention to file for Chapter 11 bankruptcy protection.