With the global economy on shaky footing again, a more conservative investing approach is warranted. Many investors direct their focus on traditional safe havens such as gold, government bonds certificates of deposit — even cold, hard cash. Food is another basic commodity whose demand remains somewhat steady regardless of the health of the economy — we all need to eat, after all.

So as you might expect, the major food stocks have performed well during the most recent downturn. Despite the stock market being flat in the past five years, diversified food firms including Kraft (NYSE: KFT), Unilever (NYSE: UN) and General Mills (NYSE: GIS) have experienced share price gains between 20% and 40%.

But while these companies offer stability in an uncertain economy, they don’t offer much upside. This is due to a number of factors. First, they are large, mature firms making billions of dollars in annual sales. They sell food and related consumer beverages and goods across the world, so the law of large numbers and market saturation make future growth more challenging.

The three companies currently trade at an average price-to-earnings (P/E) multiple of 14, which is reasonable, but it suggests modest growth expectations. They are also widely covered by Wall Street analysts, which means smaller investors are unlikely to be able to uncover information that isn’t already priced into the stock.

In stark contrast, Overhill Farms (AMEX: OFI) is downright tiny compared with the largest food companies in the world. Overhill is a typical food manufacturer that sells prepared frozen foods including pastas, soups, sauces, meats and vegetables. Last year, it reported $195 million in total sales, which also makes it quite small in absolute terms and compared with other publicly-traded companies. Its market capitalization is even smaller, at less than $83 million. Given its small size, the company has fallen under the radar of every brokerage house, because no analysts currently follow it.

What analysts are missing is that Overhill has a solid, albeit concentrated, customer base. Fast-Chinese food chain Panda Express, for instance, accounted for 27% of the company’s sales in 2010 and was recently ranked the 11th fastest-growing restaurant chain in the nation. This means the chain can become an even bigger Overhill Farms customer. Jenny Craig, a stable and growing diet business, made up 26% of Overhill’s sales and has equally compelling prospects, given individuals have been increasingly focusing on a healthier life style these days. Finally, grocery store chain Safeway (NYSE: SWY) made up another 18% of sales. Though it isn’t growing quickly, the company has posted steady sales as a preeminent food retailer across the United States.

Overhill’s sales did take a dip as a result of the credit crisis. This is due in good part to the fact that consumers ate out less, which adversely affected Panda Express’ near-term prospects. However, Overhill remained firmly profitable. Last year, the company reported a respectable $7.6 million in earnings, or $0.47 per diluted share. Free cash flow generation was a much more impressive $15.1 million, or $0.94 per diluted share.

Sales growth is likely to continue in sympathy with Panda and Jenny Craig. There is also the potential to add new customers through Overhill’s internal sales force (it announced a new agreement to sell Boston Market-brand frozen foods). The company is also mulling over a significant potential acquisition.

As it stands currently, Overhill trades at a trailing P/E of about 11 and a trailing free cash flow multiple of 5.5. These are quite low multiples given the company operates in the stable food industry and has decent growth trends.

Action to Take –> Looking at the past five-years, an investment in Overhill Farms would have outperformed the market and the largest food firms in the sector. During this period, the company has returned about 80%, since it has been able to grow from a smaller base and out of the spotlight of most investors.
 
The future looks equally bright for Overhill Farms. Investors will need to watch the company’s customers closely, but sales and profits are likely to at least recover to their 2008 levels within a couple of years. This suggests sales prospects of nearly $240 million and earnings of $0.65 per diluted share. Applying the current P/E to these earnings suggests a stock price more than 40% above current levels. However, Overhill ‘s P/E prior to the downturn was closer to the those of larger food firms, which balances the fact that it is smaller, but growing faster. A P/E of 14 applied to these earnings means  80% upside potential, and a couple of more years of earnings growth means shares have the potential to double within five years. At only $5 a share, this steady stock looks like a great deal right now.

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