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You have to be a glutton for punishment to be short these days, especially food stocks, as they have outperformed the market on an exponential basis. Believe it or not, although the Nasdaq is actually up during 2009 (the Dow is down only about 10%), food stocks have been on an absolute tear, rising at twice the clip of the overall averages. Just within the last two weeks, the “BFF” index has appreciated a stellar 8.6% from $118.20 to $128.39, but don’t get too giddy, as the overall market is overbought and needs some “pause to refresh” action, through orderly profit taking. I might be inclined to be a buyer on any weakness, as a retest of previous lows is looking more and more unlikely.

Expectations have been smashed: The good thing about a bear market is expectations tend to get too pessimistic and companies end up having an easy time surpassing them. It is effortless for management to “over deliver” when the bar is set so low, and that is exactly what seems to be occurring among “BFF” components.

Component Update

CAG: The company reported third quarter earnings, soundly beating Street estimates and earning a broker upgrade in the process, as Bernstein & Co upped its opinion from under perform to market perform. The company’s earnings improvement was attributable to a 20 basis point cut in its SG&A costs, a 33% reduction in interest expense and an 8% decrease in its shares outstanding. Though the company experienced a 6% gain in sales, its gross profit margin deteriorated 40 basis points, from 24% to 23.6%, something management needs to turn around quickly.

TSN: The company announced it will be closing down a meat processing plant in Oklahoma that will result in a 2 cent charge to its second quarter results. The plant closing is designed to help TSN streamline its operations and will eliminate 580 jobs. TSN is in the process of seeking a buyer for the property.

SFD: Senior VP Richard Poulson, recently purchased 7000 shares at $8.46 in the open market. This acquisition increased his ownership stake 40% from 17000 shares to 25000 shares. Insider buying is always a welcome sign.

PBY: In less than ten days, the auto parts retailer is expected to announce fourth quarter earnings and update its first quarter sales trends. PBY is forecast to lose 69 cents per share on sales of $466 million. There could be some good news unveiled, as the first five weeks of the first quarter, resulted in sales trends 10% above expectations. Stay tuned for the fireworks.

CKR: The $6 Burger purveyor delivered a nice 4th quarter surprise, beating analyst estimates by a penny. Helping CKR were a drop in food and payroll costs as well as a 22% fall in interest expense from $15.6 million to $12.2 million. The impressive part of the report was that CKR was able to produce an earnings gain despite a 3% loss in revenues. The company also announced it will utilize Top Chef’s Padma Lakshmi in an upcoming steaming new commercial.

IPSU: Shareholders finally got their sweet tooth satisfied when the stock bounced back 17%, despite an overall market selloff on Friday. Wednesday’s huge volume day was attributed to IPSU’s largest shareholder exiting its position. Barclays PLC sold most of its 28% stake in a single 3.2 million share block. The question is: who was the buyer? Barclays obtained its IPSU stake as a result of Lehman Brothers' Chapter 11 filing (Lehman was the previous owner of the stake). A strong, recognizable buyer could go a long way in restoring investor confidence.

SLE: The dessert maker saw a nice pop to its share price, when it was reported the company is intending to sell its European Household and Personal Care segment to concentrate on core food operations. The sale could fetch up to $2.4 billion, representing almost 42% of SLE’s current market cap of $5.7 billion.

Grocery chains: SVU, GAP, WINN and SWY all have seen nice relative strength, as rumors of an imminent consolidation within the industry (namely KR purchasing SWY) have brought buyers to the checkout line.

JBLU: It is interesting to note that both JBLU and LUV have the exact same 2009 earnings estimates of 57 cents. This clearly earns JBLU the status of the superior investment between the two, with a forward PE of 7 versus LUV’s Forward PE of 11.

SCS: The office furniture manufacturer is expected to report second quarter earnings on Tuesday. Estimates show the company producing a 1 cent loss on sales of $677 million. Most of the bad news is apparently behind it, if you judge the company by its share price, as it has rallied almost 90% from its March lows.

BRID: Dimensional Fund Advisors Inc. has emerged as BRID’s largest outside shareholder with a stake of 384,000 shares or 4%. If it adds enough shares to its position to obtain 5% ownership, the company will be required to file a 13D form with the SEC indicating so.

Today’s lesson: You have to be able to filter out the noise. The market is full of contradictions. Phrases such as “Don’t catch a falling knife”, “The trend is your friend” and “Don’t argue with the market” seem the complete opposite of “Be greedy when others are fearful”, “Go against the crowd” or ”Buy when investor sentiment is at negative extremes”. The name of the game is buying low and selling high. How else are you supposed to buy low unless you buy unpopular stocks? How else are you supposed to sell high unless you sell popular stocks? The point is, sometimes you have to be able to disregard all this rhetoric by filtering out the noise and relying on your gut instinct to get the job done.

The “BFF” index includes: CAG, TSN, SFD, BRID, IPSU, SCS, JBLU, CKR, SVU, SWY, WINN, GAP, PBY, and SLE.

Disclosure: Author has positions in all components.

Source: Basic Food Fund: Food Stocks Devour Bears