Basic Food Fund: Appreciation Rate Loses Steam

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 |  Includes: BRID, CAG, CKR, GAP, IPSU, JBLU, PBY, SCS, SFD, SVU, SWY, TSN, WINN
by: Mark Krieger

The last time I computed the "BFF" index, it added up to $145.66. Now two weeks later, it has risen an additional 5.4% to $153.44, but its relative strength has slackened in comparison with the DJIA, which has increased 6% within the same time frame.The rate of the fund's appreciation is slowing due to the fact that many of its components have simply gone up too much in too short of a time, creating a need for a "pause to refresh" mode.

Star performer: Smithfield Foods (NYSE:SFD) continues its stellar performance, as it has almost tripled from last November's lows. The shares have continued to gain momentum, due to: (1) short covering (2) Lower industry hog production reports (3) recent analyst upgrades (4) successful amendment to the United States-Russian pork trade agreement intended to limit trade disruptions.

Pep Boys (NYSE:PBY) rises on takeover speculation: A article released by TheStreet.com's Tim Malvin highlighted Pep Boys as a potential takeover target in 2009. The piece added some "pep" to its stock price, when it mentioned the company possesses substantial "hidden value" in its vast real estate holdings.

Component Updates

Jet Blue (NASDAQ:JBLU): How many pundits have you heard proclaiming investment in airlines is a sure fire way to lose money? Probably a sizeable majority, but strange as it may seem, JBLU actually ended up in 2008 with a 20% gain on the year versus a 34% drop in the Dow. The pundits were wrong again, as they usually are. Why else would they be pundits rather than participants?

Tyson (NYSE:TSN): The largest meat processor in the world caught a few much needed breaks lately: (1) Its bankers agreed to amend its loan covenants, by relaxing key financial ratios, and (2) Mexico lifted its meat import restrictions.

SuperValu (NYSE:SVU): One of America's leading grocery chains is scheduled to release its third quarter report on 1/7/2009. The analysts are forecasting earnings of 61 cents on revenues of $10.18 billion. I suspect management may have had the good sense to underpromise so they would ultimately be able to overdeliver. A potential contributor to earnings could be the recent decline in gasoline prices, especially since consumers have more cash to spend on groceries now that they are spending so much less on gasoline. What will they do with these savings? The research group "Precima" recently surveyed 3000 consumers on what they intended to spend their gasoline savings on, and 48% of the poll's respondents selected groceries. This coupled with budget minded consumers, "eating out" less often should translate into higher tallies at the checkout line.

Great Atlantic & Pacific Compan (GAP): The regional grocery chain is slated to publicize its third quarter results on 1/8. The consensus of analyst estimates peg sales at $2.17 billion, with a loss of 35 cents. GAP's sales forecast of $2.17 billion, representing a 1.5% sequential revenue drop, could be too low because the company's success in its private label endeavors could help boost sales as high as $2.3 billion. This type of sales gain could pave the way for a blowout quarter, a feat way past due.

Bottom line: Although I still believe the "BFF" will rise to the $200 area (30% rise), by the end of the year, it has become somewhat overbought and needs to correct about 10-15% before further investment is warranted. The fund is in the process of making higher highs and higher lows, but is destined to fall back to the bottom portion of its "rising bottomBasic Food Fund: "Appreciation Rate Loses Steam line", creating another superior buying opportunity down the road.

BFF Index: TSN, SFD, CAG, TSN, BRID, PBY, SCS, JBLU, CKR, GAP, SVU, SWY, WINN and IPSU.