How TradeSmith Plays Rising Food and Lumber Prices
You only need to open your eyes to see that prices for nearly everything are rising.
Raw material costs continue to explode.
After the COVID-19 shutdown in March 2020, companies pulled back on manufacturing.
Now, a year later, we’re witnessing a huge strain on supply chains. We have a shortage of commercial truck drivers (a problem that existed years before COVID). At the end of 2018, there were an estimated 60,000 drivers needed, according to the American Trucking Association. And the problem has only gotten worse.
This factor will impact almost every product’s price and its availability in the coming months.
We also have a global shipping-container shortage.
Ocean freight stocks have ripped higher in April. For example, shares of Star Bulk Carriers (SBLK) popped 12% yesterday. It’s up more than 40% since April 1.
Lumber prices are out of hand. A huge collapse in sawmill capacity helped drive futures prices up more than 50% in 2021.
Corn prices continue to rise, and they are likely to head higher, due to significant bottlenecks in freight ahead of the 2021 harvest months.
Remember, almost everything in the grocery store you eat likely involved corn in its production. Cosmetics, yogurt, toothpaste, Windex, Goodyear rubber tires, hand sanitizer (ethanol-based), plastics, crayons, and even hand soap use corn.
And corn is used as feed for chickens, pigs, cows, and other farm animals.
So, gasoline, crude oil, and even that ham sandwich are now more expensive.
What’s happening with commodity prices today has no precedent. There’s never been a global, interconnected economy of this size reemerging from a crisis.
Not even 2008-09 compares to our current predicament.
So, how do we choose which stocks to ride if we want to protect ourselves against rising costs? That’s where TradeSmith works its magic.
Understanding the Economic Story
I don’t know if you took Economics 101. But somewhere in the back of my mind sits that one lesson about consumer prices.
Right after the professors teach the basics of supply and demand, the next lesson is vital.
The difference between “elastic” demand and “inelastic” demand.
Elastic demand is the change in consumer demand based on rising or falling prices. If prices are higher, people buy less.
If the price of an elastic product drops, consumers buy more.
Inelastic demand is different. Consumers will largely buy those products regardless of price. Buying habits do not change.
Think gasoline, salt, cigarettes, prescription drugs, and a lot of raw materials. At the manufacturing level, a company will look to pass on the rising cost of raw materials to consumers.
That’s especially true in the housing sector right now.
In February, the National Association of Home Builders (NAHB) released a pricing report that said higher lumber costs would increase the average new home price by $24,000.
Three months later, that NAHB figure is now almost $36,000.
That’s what happens when lumber prices increase by 340%.
Yet, housing companies like Lennar Corp. (LEN), Meritage Homes (MTH), and PulteGroup (PHM) continue to build. Their share prices continue to rise. And all three remain in the Green Zone within TradeSmith Finance.
Meanwhile, Louisiana-Pacific (LPX), a manufacturer of building products, just crushed earnings today. It produces weather-tested siding, fences, sheds, and frames. Their customers are the housing companies listed above.
It too sits in the Green Zone on TradeSmith Finance.
Despite rising prices, homebuilders are gobbling up LPX products.
Of course, it’s not just housing products and lumber that are facing strong price increases.
If we’re looking at inelastic demand, one has to think about food. With rising prices, food manufacturers will pass on these rising commodity costs to protect their margins.
With the price of food materials rising, we want to find companies that can avoid brand substitution by customers or sell products that serve as low-cost alternatives.
Let’s check TradeSmith Finance for an idea that just emerged as a buy on Monday.
This Looks Like a Buy
Hormel Foods (HRL) is a global food company with several big brand names. It has more than 35 brand categories that hold the No. 1 or No. 2 position in market share.
The company operates in four segments.
· Refrigerated foods (54.9% of revenue)
· Grocery products (24.8% of revenue)
· Jennie-O Turkey Store (13.9% of revenue)
· International & other (6.4% of revenue)
Last year, it generated 67% of its revenue from retail stores.
Another 26% came from foodservice. One can expect this to increase with restaurants reopening.
Finally, it generated 7% of revenue from international operations that include joint ventures, licensees, and subsidiaries.
This company is very U.S.-centric. Brands include Hormel bacon, Chi-Chi’s, Don Miguel, Justin’s, Jennie-O, Skippy, and Spam.
You might laugh at the idea of Spam.
But love it or hate it… Spam is inexpensive. The pork meat in a can is a very popular item when food prices increase. Back in 2008, when food inflation was running hot, Spam sales surged.
In the second quarter of 2008, Spam was one of the primary reasons why profits increased by 14%.
We can expect a similar boom if food prices continue to rise.
The company is also a trendy dividend stock. It has increased its dividend for 55 straight years. Today, it pays a dividend of 2.09%. We expect the company to hike that dividend again in 2021.
Hormel’s stock has been treading water this year. It has underperformed the S&P 500 and lagged against the Consumer Staples Select Sector ETF (XLP).
But the stock looks to be emerging from its slumber.
It just entered the Green Zone within TradeSmith Finance on Monday.
Given that we’re looking for conviction on HRL, we also see it qualifies for three Ideas Lab strategies: Low Risk Runners, Best of the Billionaires, and Sector Selects. Also, we see that Ray Dalio, the head of the world’s largest hedge fund, is an owner.
If you’d like to learn more about the Low Risk Runners, Best of the Billionaires, and Sector Selects, you can go here.
Remember, TradeSmith can help you remove the emotion from buying and holding stocks. We can identify major trends like rising food prices. Then, with our screeners, we can identify new companies that just entered the Green Zone.
We use trend analysis to qualify the opportunity and TradeSmith to quantify it. Tomorrow, I’ll be back with more ways to curb your emotions and ride the opportunities this market provides.