Stock Analysis & Ideas

Rising Interest in General Mills Stock (NYSE:GIS) Signals a Worsening Economy

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Typically, investors tend to take consumer staples giants like General Mills for granted. However, with a surge in interest toward GIS stock, market participants may want to read between the lines.

In most cases, companies like General Mills (NYSE:GIS) tend to operate on the sidelines. While representing an important cog in the broader economy, the consumer staples giant doesn’t deliver the profound innovations typical of technology startups. Instead, General Mills helps feed the world (usually at breakfast), which isn’t an enticing narrative. Therefore, when institutional investors bid it up, it’s worth investigating why. I am bullish on GIS stock.

At first glance, General Mills doesn’t seem anything special. Currently, TipRanks notes that GIS stock features a Hold consensus rating. Out of 14 analysts covering the underlying enterprise, only two rated the shares as a Buy. To be fair, blogger opinions stand on more optimistic ground. Nevertheless, many financial writers don’t have much skin in the game, somewhat clouding the framework.

However, look at the charts and GIS stock suddenly seems much more intriguing. On a year-to-date basis, shares gained nearly 33%. For comparison, the benchmark S&P 500 (SPX) index dropped almost 17% during the same period. While a decidedly positive development for General Mills stakeholders, it might not be a great sign for the underlying economy.

Let’s face reality: if investors anticipated rough times ahead, they’re not going to bid up speculative or purely growth-oriented names.

As data from the U.S. Bureau of Economic Analysis indicates, the personal saving rate in October of this year slipped to 2.3%. This is a low not seen since July 2005. Further, with the Federal Reserve continuing to raise the benchmark interest rate to combat skyrocketing inflation, circumstances ring rough for the discretionary consumer segment.

Right now, the emphasis centers on saving money and riding out the choppy economic waters. Cynically, this helps GIS stock but at the expense of other investment categories.

Hedge Funds Move in on GIS Stock

Aside from the outside fundamentals undergirding GIS stock, it’s intriguing that Wall Street has been keen on boosting its valuation. Yes, General Mills gained about 12% in the trailing month, an impressive tally especially given the circumstances. Even hedge funds increasingly see the wisdom in building a position in GIS.

Back in the second quarter of last year, hedge funds collectively owned almost 1.99 million shares of GIS. By Q3 of this year, this count increased to 3.03 million shares, or an increase of 52.44%. To be fair, between Q2 and Q3, these institutional players reduced exposure to GIS stock by 214,100 shares. That’s why the confidence signal pings negative. Still, the broader trend rates positively, aligning with rising bullishness in General Mills in the open market.

Natively, the sentiment upswing among hedge funds commands attention because of the information and resource gap. While many individual retail investors do very well for themselves, on average, market participants perform better with better information.

With hedge funds, they have access to the best analysts along with the best analytics. They live and breathe market dynamics, and they’re paid to know what’s going to happen before the rest of the masses do. Otherwise, nobody pays money for the privilege of losing.

It’s this framework that makes GIS stock so compelling. It’s not just about General Mills itself or the consumer staples segment. Rather, hedge funds enjoy numerous other opportunities to place their bets. That they chose GIS raises deeper questions.

Furthermore, options traders as well recognize the potential upside opportunity in GIS stock. At the start of this week, traders purchased 12,363 call options on General Mills. This spike represented about a 196% move compared to the typical volume of 4,176 call options.

Is GIS Stock a Buy, According to Analysts?

Turning to Wall Street, GIS stock has a Hold consensus rating based on two Buys, 11 Holds, and two Sell ratings. The average GIS price target is $80.87, implying 7% downside potential.

The Fundamentals Should Make General Mills Worthwhile

In the spirit of total transparency, GIS stock might not initially appeal to some investors because of its value proposition. A case can be made that its premium is too rich. However, the overriding fundamentals should make this investment palatable in the long run.

Specifically, the market prices GIS at 18.3x trailing-12-month (TTM) earnings. That’s a bit on the “wrong” end of the industry median value of 17.6x. Further, GIS features a 21.3x forward earnings multiple. Here, the sector median sits at 15.7x. On paper, then, investors certainly have access to more discounted opportunities.

However, prospective buyers also shouldn’t ignore the quality of the business. For instance, General Mills’ net margin (on a TTM basis) stands at over 15%. This rates better than 89.5% of the competition. Moreover, the company’s return on equity pings at almost 29%, indicating a superior capacity to convert equity financing into profits.

Moving forward, the consumer may be tapped out. Yes, many economists believe that Americans are still sitting on trillions of dollars worth of pandemic savings. However, with credit card debt skyrocketing to all-time highs, it’s difficult to imagine why cash-rich consumers would get themselves into such debt in the first place.

Nevertheless, people need to eat, and it’s this cynical reality that should keep GIS stock in the game while other retail plays suffer.


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