The Midwest drought has made plenty of money for speculators in the agricultural commodities futures. On the other hand, it has created an excellent buying opportunity in one of the best of breed companies in the meat business, Tyson Foods (NYSE:TSN).
Tyson Foods is America's largest (world's second largest) producer and exporter of beef, chicken, and pork products. It supplies meat to grocery stores and global fast food franchises such as Yum Brands (NYSE:YUM), McDonald's (NYSE:MCD) and Burger King.
The reason Tyson's stock has been beaten down by 20% over the past month is due to speculation on the adverse effects of higher corn prices. With the sharp rally in corn, it seems like these risks are already priced into corn futures. Compounding this with Tyson's sell-off, I believe that the expectation of higher feed cost is priced into Tyson's stock.
What makes Tyson an attractive buy is its cheap valuation, oversold technicals, and the long-term bullish affect this drought will have on the price on the meats. Initially, high grain prices have killed the meats futures as farmers are slaughtering livestock early to minimize future higher feed costs. In the long run, however, this will create a shortages in pork, beef, and chicken in the intermediate future, which will boost meat prices.
Tyson's valuation is also favorable and the stock is technically oversold. The stock is trading at a forward P/E of just 7.6 and PEG ratio just above 1. Even after the Draghi hype bounce in global markets, Tyson still is oversold with a 14-day RSI of 25 and the stock hitting lows last seen in January 2010. $14.50 has been a strong level of support for the past 18 months, and the stock has managed to hold there. Momentum indicators such as the MAC-D and stochastics are crossing bullish even as the price has fallen due to reduced selling pressure.
Overall, with the bearish risks largely priced in the stock and its long-term ability to benefit from high meat prices, Tyson is a great buy at current valuations. It also does not hurt that the stock is extremely oversold and sentiment is extremely pessimistic on meat producers.
Disclosure: I am long TSN.