Food Stocks Outperform the Market

by: Mark Krieger

We have all heard it: food stocks are defensive in nature so that when things are dreadful, they shouldn’t get beat up as bad, and when things are good, they don’t participate with the same rigor on the upside as other stocks. But in this market, it just hasn’t worked out that way. In fact, when the market dived earlier in the year, food stocks actually had poorer relative strength than other sectors, but then when the market bounced back, the food sector’s relative strength was superior. The moral of the story: Sometimes you just have to throw out all the rules and trade by the “seat of your pants” utilizing your own gut instincts as your guide.

Since my last update, the Basic Food Fund Index (BFF) has risen 6.3% from $157.74 to $167.73 while the DJIA fell 4.7% from 8540 to 8147, equating to a staggering 1,100 basis point positive variation. Since the March 9th low of 6547, the DIIA has climbed over 24%, while the BFF index has vaulted 38.4%, 58% higher than the DJIA's pace (so much for the premise that lower beta stocks produce lower returns).
The stars of the group: The best performer was BRID, up a shocking 254% in the past four months (representing an APR of 762%). In second place came SFD, which tacked on 135% since its March low of $5.60. The bronze medal went to IPSU, gaining 103%. One of the biggest reasons all of these equities soared at the levels they did was they simply got so beat up that their valuations were laughable at their lowest points. The market simply realized how idiotic it had gotten at its maximum levels of pessimism and reacted accordingly.
BRID’s torrid appreciation pace (it has now reached a four-year high) is probably attributable to three factors: (1) the company’s earnings turnaround (2) its lack of float (there are only 1.8 million shares available to trade) (3) the company’s stock buyback plan (the company is actively buying in the open market and 500,000 shares still remain available for repurchase) .
IPSU’s meteoric rise was likely aided by a turnaround in sugar prices coupled with the resumption of its Port Wentworth refinery operations and a Broker upgrade.
SFD’s strong showing was due to two successful senior note placements, better than expected fourth quarter earnings results, a Moody’s ratings upgrade (from negative to stable) and resumed takeover speculation by China’s largest pork producer.
Here's how the rest of the BFF index performed: WINN returned 68%, TSN: 63%, CKR: 52%, SLE: 42%, CAG: 33%, DLM: 29%, LUB: 23%, GAP: 22%, SWY: 12%, FLO: 5% and finally, the only component that actually lost value was SVU, dropping 1%.
What to do next: go with the trend, but chasing stocks at these levels could be foolish. Wait for pullbacks to acquire more shares. Most food stocks are making higher highs and higher lows, so it makes sense to buy near the base of a stock’s rising bottom line. Focus on equities with little or no debt (BRID and IPSU), or those with decent dividend yields (SVU, CAG, SLE and FLO all are yielding over 3%). For those with a higher risk tolerance, looking at the bottom four performers within the BFF makes sense since they are still relatively oversold and due for a much greater bounce once their operations stabilize.

Disclosure: Long all equites included in the BFF Index.