Jim (cont'd):     

The numbers say that store brand sales are up... According to Nielsen, dollar sales of private label brands increased 10% for the 52 weeks ending November 1... We hardly ever see any double-digit sales of anything anymore... compared to 3% for branded products. And remember... the recession didn't really get nasty until November... so I bet the numbers are only getting a better.

Store, or private-label, brands now account for 22% of products sold at grocery stores, up from 20% a year ago.
Let there be no doubt... we are now in a knockoff of economy... the New York Times just confirmed on Friday... store brands, also known as private-label, you know, the fake Cheerios that you find on the bottom shelf, lift grocers in troubled times... "Store Brands Lift Grocers in Troubled Times"...

That was what the article said. I liked the article. I've got to tell you, sometimes you read the Times and you get some fantastic investment ideas... but you got to do a little homework, which is what we're doing now...

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The CEOs of supermarkets say that store brands are doing great... Cramer fave, Costco, says Kirkland brands are en Fuego... You should go listen to the conference call... it's a really good call... and not just because my fallout shelter is darn full of them...

The CEO of Kroger noted an acceleration of customer attrition in corporate brands... The CEO of Safeway said the same thing. Private label brands are growing much faster than national brands. The CEO of Supervalu said that its private label brands are exceeding their growth expectations... they think that the upside is greater than they had previously anticipated.

So, why oh why, I ask you... of course, plaintively... are the stocks of these companies that make these brands such bow-wow's?... I mean, genuine doggies?...

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I recommended Ralcorp Holdings Inc. (RAH), the number one private label cereal maker as a trade down play on September 19... it was at $67... Oh man, that was like Lehman Brothers time... That's 11 points higher than the current price... By the way, a lot of stocks are down so much from then... I mean, it's kind of interesting that there are still a lot of bargains...

I believe this is a great play on people getting poorer... but the stock is not working.

Treehouse Foods Inc. (THS), another store brand, that makes pickles... soups, baby food... has also seen its stock plunge over the last month and a half...

So what is the tale of these to knock off food makers?...

This is one area where there is legitimate growth happening... and it seems like the market could not care less...

Why?... Because I think investors don't see these stocks as safe... They don't pay dividends... they are big acquirers... RalCorp recently bought Kraft... and Treehouse recently bought ED Smith... a company that makes jams and sauces...

Now, I want to see acquisitions in this environment. Remember the lesson of the investment guru... shotgun weddings make us money... but the fact that these companies are acquirers without great balance sheets means that they have to borrow a lot of money... and that creates a sense of uncertainty that maybe RalCorp and Treehouse may be can't generate enough cash to repay the debt... Okay, Treehouse has got $551 million in debt... compared to its $745 million market cap... RalCorp has $1.7 billion in debt, compared to its $3.1 billion market cap...

These are, I admit, worrisome... in this difficult environment, to be able to roll over, or refinance... As investors become less afraid, I think that they'll see that the risk might be shrouding the tremendous value that's being created by these companies for the supermarkets and, therefore, ultimately for their stocks.

You've already heard the numbers about the growth of private label brands. You know why these stocks should work. At the same time, I believe, the downside risks, I believe, are beginning to get priced into the stocks.

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So, which one would I buy?...

Right now, Ralcorp Holdings Inc. (RAH)...

Treehouse, which has got... you know, when they spun it off, I thought it was pretty sexy... Treehouse is still dealing, though, with declining volumes... down every quarter in 2008... as the company eliminates the unprofitable sales in their pickles and baby food business...

I would wait a quarter or two before buying Treehouse... which is also the more leveraged of the two... Don't write off Treehouse completely though... We'll be hearing from their CEO later... and let's give him a chance, right... Maybe he can make a better case for the stock than I can.

RalCorp is absolutely though the better play in my opinion.

It's been pursuing a hybrid strategy ever since it bought Post from Kraft, where it sells both private-label and branded foods. The Post acquisition appears to be moving ahead of schedule... it should mean better gross margins for RalCorp, as Post margins are much higher margin...

Post isn't part of the trade down play. Maybe that's also one of the reasons why RalCorp hasn't worked right now. But, because it's the number three national brand, I think there is a big turnaround potential...

Plus... if, say, lower gas prices cause people to shift back to national brands, away from private-label... the Post acquisition should let RalCorp benefit from that...

Here's the bottom line...

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The Bottom Line!:     People do feel poorer... people are poorer, despite the Benjamin booyah Bernanke moves today... and they're buying more cheap, private label food... yet this trend is showing up everywhere but in private label stocks... like Ralcorp Holdings Inc. (RAH). Sooner or later, I think the stock will show it too. Now, if you bought on my recommendation, I got it wrong. I'd like to say that I was too early, but I got it wrong... and I am saying, not only should you trade down, but you should, yes... and this is a simple thing to say... but you should average down... The Times tells you what's happening. We tell you on Mad Money how to play it, and I think you play it with RAH... and possibly Treehouse Foods Inc. (THS)... although we'll have to hear from the CEO later, before I'm willing to give that one a thumbs up.