Food stocks have been out of favor for a while. From its all-time high in 2022, Hormel Foods has lost more than 60% of its value. That sounds like a stock to avoid. I see it as an opportunity. Not because I think the price turns around tomorrow. But because this is a fundamentally solid company in a structurally underestimated segment, trading at a price that offers a real margin of safety.

The underlying story is simple: people eat. Always. AI enthusiasm, the Ozempic hype, private labels — all of this is changing the market, no doubt. But none of it makes eating obsolete. Anyone writing off Hormel because GLP-1 users buy fewer "unhealthy" foods is confusing a trendy headwind with a structural death sentence. That's a mistake.

Hormel sells the things that are never missing from an American household: Spam, Skippy peanut butter, Planters nuts, Jennie-O turkey, Hormel bacon. Not glamorous products. But products that get bought. And it's exactly this portfolio that has been under pressure.

The list of challenges is long and real. Rising costs for raw materials, energy and logistics have squeezed margins. Price increases helped at first, but pushed more and more customers toward private labels. And then there's Jennie-O. The turkey brand suffered massive supply chain disruptions from avian flu, took serious volume losses, and then had to deal with low market prices on top of that.

Operating profit fell 33% last fiscal year. That's not a cosmetic issue. But management is responding. The company is selling its whole-turkey business and shifting focus toward higher-margin products like ground turkey, fillets and deli meats. A sensible move, in my view. I also like the push to streamline operations and bring costs down. The strategy is called "Expand, Transform and Accelerate." Whether it delivers is an open question. But the direction is right.

The price-to-cash-flow ratio currently sits at around 13, below the historical average of 17. Given the expected growth rates for the coming years, I find that attractive. The long-term return potential derived from operating cash flow alone is above 7%. Add a dividend yield of over 5% and the picture gets more interesting. I consider the dividend well-covered and expect Hormel to extend its streak of 40 consecutive years of uninterrupted payouts. My confidence is grounded in the balance sheet: net debt is low, and financial quality is exceptional for a food company. I weigh these factors higher than the current headwinds.

My thesis plays out if three things happen: raw material costs stabilize, the portfolio restructuring delivers measurably better margins, and Jennie-O's refocus shows early operational improvements over the next few quarters.

The biggest risks I see are sustained input cost inflation and weakened consumer demand from a difficult macro environment. Either could push back the turnaround timeline. I consider this risk real, but not existential.

What I don't expect: a quick rally. The long-term downtrend is intact, and the recovery since October is fragile. Further setbacks are possible and, given the setup, would not be a reason to sell. They'd be a chance to add. Anyone entering here should size the position accordingly: small enough to ride out further weakness, large enough to actually matter when the recovery comes.

Disclaimer: This newsletter is for informational purposes only and does not constitute investment advice. I am not a financial advisor. Always do your own research before making any investment decision.

Disclosure: I may hold direct or indirect positions (including options) in any securities mentioned in this newsletter. My opinions are my own and always honest.