Food processing stocks are doing well despite rising input prices. Kellogg is a familiar name at the breakfast table and in investor portfolios.
The Stock: Kellogg Co. (K-N) Recent price: $53.42*
The Trend
Major spells of food inflation can spur social unrest. They also affect
the valuations of companies in the global food industry.
Casual dining restaurants are among the companies that feel the squeeze
from rising agricultural prices. When consumers last confronted rising
food costs three years ago, dining stocks such as Ruth's Hospitality
Group, Ruby Tuesday, Chipotle Mexican Grill, Texas Roadhouse and units
of Keg Royalties Income Fund struggled. Although last week saw a rise in
many U.S. restaurant stocks, the trend since late 2010 has been
deteriorating.
Stocks of major food processors are a different story. Some of these
producers have commodity hedging programs and more room to pass along
higher input costs. Consider the surprisingly strong results of meat
producer Tyson Foods, announced late last week. Its shares are
categorized as newly Stock Trends Bullish and are a current stock pick.
The Trade
In 2007 and 2008, commodity price inflation was acute. The U.S. consumer
price index for cereals and bakery products rose about 15 per cent, but
the stock of Kellogg Co., the world's largest cereal maker, outperformed
the broader stock market during most of the period. Its shares have been
struggling since last May because of competition and product recalls,
but the recently announced fourth-quarter earnings suggest a corner has
been turned.
Kellogg's stock advanced 5.8 per cent last week, and turned to Stock
Trends Weak Bearish - an indicator that points to a move above trend
line resistance. While consumers may be faced with higher prices for
their granola, Corn Pops and Pop Tarts, shareholders should be
encouraged by improved revenue expectations. The company plans more
product price increases in 2011, on the order of 3 to 4 per cent.
Trend-following investors will like the stock's aggressive move above
$52, with trading volume in the stock last week lifting 60 per cent
higher than its weekly average of the past two quarters.
The Upside
Although the current rally may only lead to the stock regaining its 2010
high of $56, shareholders can anticipate market outperformance over a
longer period. Recent analyst upgrades also suggest this trade can offer
more.
The Downside
The 40-week moving average trend line sits near the $51 mark. A drop
below that level suggests it's time to exit this trade.
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