I often talk stocks with my father, and he believes that with the economy in tatters, the big beneficiaries in the coming year will be companies that produce and sell food. His simple theory is that with discretionary spending at a minimum, "everybody still needs to eat."
While it's certainly hard to argue with the fact that we all need sustenance, a different case can be made for investing in suppliers and vendors of food.
My dad thinks prices at the store will rise much higher because it's still cheaper than eating out, thus, great profits will be had by everyone up and down the supply chain.
But I'm not so sure.
Cal-Maine Foods, Inc. (NASDAQ: CALM), which released earnings on Monday, is a good example of why I'm not jumping onboard with this theory.
The company, which is currently the largest producer and distributor of fresh-shell eggs in the United States, said profit for its second fiscal quarter fell 32% as sales to egg-product makers and the food service industry slowed, and feed costs remained high.
Cal-Maine earned $1.14 per share for the quarter ended Nov. 29, but last year it earned $1.69 a share.
Shares of CALM sold off sharply following the news, but climbed up steadily today.
Adams says the company, which sells its eggs under the EggLand's Best and Farmhouse brands, will continue to see strong demand at the retail level -- no doubt as consumers search for low-cost meal options. But he expects demand to remain slow in food service and the egg products industries.
In addition, feed costs, while improving, "will likely remain relatively high and could be volatile in the year ahead," he said.
The push for alternative energy, including ethanol, pushed food stock prices higher. And given the platform of the new president, we can expect more interest in ethanol in the coming year. That, of course, will cause a spike in corn prices, which will hurt the likes of Cal-Maine and other producers of food that like to see lower prices for feed in order to achieve higher margins.
In this tough economy, lower feed prices will play a major role in where CALM shares go from here.
Typically, a food stock like CALM would be considered defensive, but CALM has not offered any shelter from the storm.
Will that change in the near future?
It really depends on the economy. You can put this stock in the category of those that will rally in advance of any recovery in economic activity.
But given that the recession is expected to last for most of 2009, I would stay on the sidelines with CALM. Even then, when the economy does recover, there will be better growth opportunities. I would sell shares if I owned them.
Jamie Dlugosch is a contributor to OptionsZone.com.
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Reader Comments (Page 1 of 1)
12-31-2008 @ 5:28AM
Darin said...
This may be true for food industry suppliers as since most Americans have cut eating out from their budgets. But those companies who supply solely to the end user/ consumer, will probably see incredible 4th qtr earnings because fuel costs have come down and prices remained the same, thus pocketing the savings as pure profit