Investing.com -- Stifel analysts downgraded Kraft Heinz (NASDAQ:KHC) and J.M. Smucker (SJM) to Hold from Buy in a note this week, citing weak volume recovery and heightened reinvestment needs.

"Our downgrade reflects a lack of near term catalyst, softer volume recovery relative to peers, and potential for greater reinvestment requirements to improve volume growth," analysts noted.

Stifel expressed caution about the broader food sector, maintaining a Neutral weighting despite food stocks trading at a steep discount to the S&P 500.

The firm stated that the group trades at a 30% discount to the S&P 500, placing it in the 6th relative percentile.

However, Stifel sees the uncertain pace of revenue recovery and increasing promotional risks as reasons for investor caution.

Looking ahead to 2024, Stifel projects a 1% organic sales increase and 3% EPS growth, supported by slight margin expansion. However, volume recovery is expected to remain "choppy and portfolio dependent."

The analysts highlighted cocoa inflation as a key input cost driver but expect non-cocoa costs to stabilize.

"Input cost inflation has inflected higher driven by significant cocoa inflation. Overall we now estimate mid-single digit inflation in 2024," Stifel said, adding that it anticipates only "targeted price increases" and projects a 60-basis point margin expansion for the year.

Stifel also warned of rising competition from private-label brands, which have gained 60 basis points of market share year to date. "We would not be surprised to see this expand, especially if economic conditions wane," analysts cautioned.

Despite these headwinds, Stifel highlighted select opportunities. The firm upgraded its target price for Lamb Weston (to $80 from $65) and reaffirmed Buy ratings for several stocks, including BellRing Brands (NYSE:BRBR), General Mills (NYSE:GIS), and Post Holdings (NYSE:POST).

They "recommend investors remain selective in their ownership," focusing on names with stronger growth profiles, the firm added.

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