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Smithfield Foods: Too Dependent on Pork

Smithfield Foods (SFD), America's largest pork producer, announced on Feb. 17 that it would close six plants. The last 12 months have been tough for the stocks of food processors, with Tyson Foods (TSN) off 39%, Hormel Foods sliding (HRL) 24%, and Smithfield down 66%. On top of high debt and poorly integrated acquisitions, the company suffers from a lack of diversification: It primarily raises hogs and sells pork. The strong dollar makes U.S. pork a pricey export, threatening overseas demand that accounted for 18% of sales in 2007. Tyson sells chicken as well as pork and doesn't raise hogs, giving it more control over costs. Hormel has higher-margin products, such as Hormel Chili, in its mix. "It's a very difficult environment," says Deutsche Bank (DB) Securities analyst Christina McGlone. With chicken expenses lower and sales falling less than other meats, she has a buy on Tyson.

Packaging Corp. of America Tops the Paper Sector

Investors in the beleaguered paper industry got another jolt on Feb. 18 when the CEO of International Paper (IP) told Bloomberg his company might cut dividends. Shares of many companies in the debt-heavy sector have been hit by plummeting demand and the Jan. 26 bankruptcy filing of papermaker Smurfit-Stone Container.

Lee Eugene Munson, chief investment officer at money manager Portfolio in Albuquerque, says International Paper isn't a buy despite its 80% drop in the past year. He prefers Packaging Corp. of America (PKG), one of the largest makers of cardboard boxes. Packaging was one of the only paper companies to report fourth-quarter profits, owing to superior management, Munson says. It has been cutting costs to offset falling demand while building up cash on its balance sheet. And Packaging has no debt coming due for the next five years, a cushion its troubled competitors lack. "It's the best defensive play in the industry," Munson says.

Positive Cash Flow

Equity mutual fund managers finally enjoyed positive net inflows in January, following seven straight months of redemptions that totaled $147 billion, according to research firm Strategic Insight. Some $7 billion flowed into domestic ($5 billion) and international ($2 billion) stock funds. Avi Nachmany, Strategic Insight's director of research, thinks the fund flow numbers he's seeing bode well for an end to sizable net redemptions. "At this point, people stay committed to whatever they have invested," he says.

During those seven months of redemptions, the Standard & Poor's (MHP) 500-stock index fell almost 35%; so far in 2009, it's down more than 12%. Nachmany is a long-term bull. "In five years, you're going to look back and see a company like General Motors (GM) at $2 and think, that could have been the greatest opportunity of our lives," he says. "Wealth creation is not finished. We just have to get to the other end, alive and employed."

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