Jubak's Journal Recent articles: • Do-nothing Fed is dangerously disengaged, 9/9/2005 • 5 water infrastructure bets, 9/7/2005 • Save your portfolio from Katrina and the Fed, 9/6/2005 More... | Jubak's Journal Buy gourmet stocks at fast-food prices A big harvest last year, a drought this year and a killer hurricane make crop prices impossible to forecast. Some first-class companies will get it wrong and get clobbered. By Jim Jubak Answer me this: Should the price of corn, soybeans and wheat be up or down in the wake of Katrina? Don't know? Well, neither do food companies. Even the best food companies. All I can tell you right now is that crop prices will be volatile. Some very good companies are going to get it wrong and wind up taking a big hit to short-term earnings. Among the casualties will be companies with sterling records of delivering above-average returns to investors for a decade or more. I'd expect that the shares of some of these great long-term investments will get crushed when investors punish them for failing to predict the unpredictable. That spells an opportunity for investors willing to look past the short-term bad news to buy shares of some of the safest and highest return stocks on the U.S. markets. All you have to do is follow my "Wait-until-they-get-clobbered, then-buy" strategy.
Against the grains Want to know how tough it is for food company CEOs right now? Just look at how tricky the market has been for the big three grain commodities. It was tough enough to predict grain prices before Katrina. Drought in the Midwest, the worst in 17 years, was expected to cut the U.S. corn harvest by 12% this year and soybean production by 11%. Despite those shortfalls, grain prices looked to be lower this year. The U.S. Department of Agriculture was on Aug. 15 projecting $2 a bushel for corn, 3.4% below the $2.07 a bushel average for the 2004 crop. How come? The record corn and soybean harvests of 2004 had left grain silos bulging. With so much grain in storage already, farmers were likely to get less for their 2005 crops. Katrina has made getting it right even harder. Hurricane Katrina ripped apart the system that sent crops south along the Mississippi on barges for storage or export from New Orleans. No one knows how, or when, the grain harvest that begins this month will get to market. Related news and commentary on MSN Money
With a smaller 2005 crop and chaos in the shipping system, you would expect grain prices to up, right? Dead wrong, at least for now. With the first corn, soybeans and wheat just now being harvested in the southernmost states of the U.S. grain belt, such as Arkansas, prices for corn delivered now have tumbled to $1.65 a bushel. That's a huge 17.5% below the $2 a bushel that the U.S. Department of Agriculture was projecting for corn on Aug. 15. And that projection was already 3.4% below the $2.07-a-bushel average for the 2004 crop. That actually makes sense. Katrina knocked out so much grain storage capacity and made it just about impossible to get grain out of the port of New Orleans. Many grain storage facilities were still bursting with last year's record harvest. That means farmers don't have many buyers, but they don't have any place to store their crops. Navigating the corn-price maze So, right now the grain markets are assuming that farmers who bring crops to market in the near future will be forced to sell for whatever price they can get. The same commodity market is also telling farmers that if they can find some way to deliver corn in January, instead of now, they'll get a better price. On Sept. 8, grain elevators in Iowa that were paying $1.65 for corn delivered immediately were offering to pay $1.88 a bushel for corn delivered in January. Imagine that you're the CEO of a company like Corn Products International But now? Would you have been better off going unhedged and getting the benefit of current low prices? That kind of second-guessing is enough to keep you up at night. But you've got other worries too. Corn prices may be down, but will kinks in the grain transportation system mean that you won't have enough corn to process when you need it? And then, how about getting that corn syrup and starch to international markets in Mexico and South America? Will the low price of corn translate into low prices for the corn byproducts of your company's syrup- and starch-making processes? That's a lot of moving parts. The likelihood is extremely high that something will zig when the company had projected it to zag. Wall Street's expectations for Corn Products International are equally high: 26% earnings growth in the third quarter of 2005 from the third quarter of 2004 and 123% earnings growth in this year's fourth quarter. The stock is a good example of what can happen when a company's management gets commodity prices wrong. The stock was crushed in April, dropping from a high of $30.25 to $20.98 when higher-than-expected corn prices led to lower-than-projected margins. Corn Products would be perfect for my "Wait-until-they-get-clobbered, then-buy" strategy, except for two very, very minor details. First, it was already crushed earlier in 2005 when it got the direction of commodity prices wrong, and second, I already own it in Jubak's Picks. (So I've already had the pleasure of being on the wrong side of a market "crush.") Wait for the carnage Better candidates for this strategy are stocks that
2) tend to sell for high multiples that put me off buying them 3) never seem to go down, despite my reservations about their high valuations.
If any of these stumble because the company didn't manage to perfectly navigate the uncertainties of the post-Katrina agricultural commodities market, snap it up. My top five "Wait-until-they-get-clobbered, then-buy" candidates:
Smithfield Foods Whole Foods Market United Natural Foods PepsiCo Updates Sell Danone Group With the French government taking a hard line on foreign acquisitions of key French companies -- what the government has called the country's crown jewels -- I think it's time to take my profits in Danone Group New developments on past columns From Russia with love: $60 oil Shortages of oil, oil-supply disruptions, soaring prices of oil and natural gas -- all work to the advantage of coal companies such as Peabody Energy Editor's Note: A new Jubaks Journal is posted every Tuesday and Friday. E-mail Jim Jubak at jjmail@microsoft.com. At the time of publication, Jim Jubak owned or controlled shares in the following equities mentioned in this column: Corn Products International and Whole Foods Markets. He doesn't own short positions in any stock mentioned in this column. | |||||||||||||||||||||||||||||||
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