UBS Sees 'Seismic Changes' In The U.S. Food Industry

In a new report, UBS analyst Steven Strycula discusses a shift in investment strategy in the U.S. food industry. According to Strycula, a dramatic change in the behavior of U.S. consumers now warrants an equally dramatic shift in the approach of investors.

"Consumers are shopping alt food channels, sampling smaller brands, seeking less processed foods and engaging different media," he explained. The ultimate impact of this behavior is a 1-2 percent drag on industry sales per year.

Strycula believes that many top food stocks have become overvalued given decelerating margins and EPS growth and category fragmentation.

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Despite the bad environment, Strycula sees opportunity in stocks exposed to health and wellness (such as WhiteWave Foods Co WWAV) and stocks exposed to developing countries (such as Mondelez International Inc MDLZ).

On the other hand, UBS urges investors to avoid large food conglomerates that will continue to fight for growth across a number of difficult categories.

One major catalyst that UBS sees in the food space is the potential for a wave of major M&A deals. The combination of weak growth, low interest rates and shareholder activism will likely lead to a number of larger companies snatching up successful specialty brands.

UBS's top Buy-rated names include WhiteWave, Mondelez and Kraft Heinz Co KHC. The firm urges investors to avoid Sell-rated Hain Celestial Group Inc HAIN and Campbell Soup Company CPB.

Disclosure: the author holds no position in the stocks mentioned.