Trend profile: Dean Foods Co.

Trend: Consumer staple stocks are weathering producer price inflation and helping defensive-minded investors anchor their equity holdings in a period of market volatility. Although the industrials and technology sectors are showing great resilience while markets digest disruptions from the Far- and Mid-East rocking global stock markets, the consumer non-discretionary sector’s appeal is burnished when economic outcomes, always uncertain, flirt with disaster.

 

This traditionally defensive sector, though, has been subject to increasing input costs as extremely loose monetary conditions have primed global liquidity, fuelling inflation in the goods that fulfil our basic needs. The U.S. producer price index rose 1.6 per cent in February, and has been climbing at an annualized rate of 10 per cent since last autumn. Food stuff price increases are a significant contributor, with raw, intermediate, and finished food prices rising above broader producer price categories.

 

Major food stocks – with some exceptions - seem to be holding up just fine. The Powershares Dynamic Food & Beverages ETF (PBJ-N), conjuring the homey comfort of a peanut butter and jam sandwich in its ticker, remains Stock Trends Bullish even as food inflation has taken hold in the past two quarters. The fund is at a 52-week high and has benefited from the ability of brands like Starbucks (SBUX) and Coca-Cola (KO) to pass on input price increases to consumers, as well as improving profitability at food processors like Heinz (HNZ). General Mills (GIS) joined Kraft Foods (KFT) and Kellogg (K), featured here last month, in the Stock Trends Bullish category last week, while the shares of J.M. Smucker’s (SJM-N) hit new highs. Shareholders of meat producers Tyson Foods (TSN) and Smithfield Foods (SFD) are energized, too.

 

The Trade: Another newly Stock Trends Bullish entry in the consumer staples sector is Dean Foods, the leading U.S. dairy products processor. Its shares bottomed in December at $7.13 after a lengthy struggle with tough dairy market conditions. The stock peaked at the $47 level four years ago. Back then price inflation in corn feed brought on by swelling demand and an ethanol energy policy that displaced dairy farm capacity - as well as monetary factors - had bumped dairy prices considerably, bringing on a flush of milk supply in its wake. Milk prices collapsed from the record levels of 2007. A better prospect appears to be building now, though. The average price of milk that farmers receive this year in the U.S. has improved to about $18.40 per 100 pounds – a 13 per cent increase over last year’s average price and a 43 per cent lift above the 2009 average.

 

Technically, Dean Foods stock offers investors two basic incentives for returning to dairy land. First, its Stock Trends Bullish Crossover generally introduces fairly lengthy bull trends. Also, with the stock price now engaging the 2011 highs that have held back the stock recently, a breakout to a new trading area above $11 is in the offing. Although a far riskier trade than other big cap consumer staples stocks, Dean Foods may be a nice resurrection project amid other choices.

 

 

The Upside: Recent trading volume has been relatively uninspired as the share price consolidates below the prevailing resistance level near $10.75. If the stock is able to advance comfortably above $10.75 it should maintain its relative price performance and make moves toward unlocking investor demand. A fulfilled bullish trend would tip toward a 20 per cent move; perhaps even return the shares to the $14 level they gapped down from in the spring of last year.

 

The Downside:  The cornerstone of a good defensive stock is the security of a dividend. However, this is not a dividend stock. That’s one big notch against this investment for many, even without the risk associated with Dean Foods’ tenuous market fortunes. A drop below $9.50 would indicate the trade has gone sour.