Blasted by Commodity Inflation, Food & Beverage Stocks Make a Comeback in July as Commodities Correct Sharply

Earlier this year I recommended several food and beverage companies following declines since the onset of the sub-prime crisis. Six months later, these stocks are all trading lower despite stronger earnings and passing price hikes along their core consumer brand products.

A few months ago in The Sovereign Individual I plugged one of the world’s largest food companies following a correction. But more compelling, Warren Buffet assumed a large stake in this company along with two powerful Wall Street activist funds. The stock is unchanged from my initial entry point this spring and pays close to a 4% dividend.

Another great global giant is Groupe Danone of France.

Danone’s stock plunged almost 20% in June as panic-selling engulfed global markets. Danone’s earnings, announced last Friday, were way above consensus estimates and the stock is up more than 10% in July. Danone is the world’s largest fresh dairy company with significant market share in spring water (Evian) and a host of other products.

Last month was the worst June for stocks since 1930. Everything, except natural resource stocks, went into the gutter. The food stocks were no panacea in June. The group got plastered as fears of recession and soaring commodity prices resulted in a huge sell-off.

Despite surging input costs for the food companies this year, the majority of these giants are successfully raising prices. Consumers are still loyal to their favorite brands – even in a slowdown or recession. They won’t change their coffee brand or morning yoghurt for a lower cost alternative. I expect that trend to hold true over the next several months until stocks finally muster a bottom.

Finally, commodity inflation now appears to be waning. Oil and natural gas prices are down sharply this month lending to the first severe commodity correction since last August. Other commodities, including the agricultural commodities, are down sharply, too.

Commodities have not suffered a losing calendar year since 2001. Even in a bull market, prices can decline 25% or more in a short period of time. That’s especially true for commodities. In fact, I would not be surprised if the rest of 2008 resulted in lower commodity prices. Commodities have come a long way over the last several years and are long overdue for a correction. I would be very selective building new positions in this asset class now.

Lower commodity prices for the remainder of 2008 would boost corporate earnings. It will also help the food and beverages group enormously.

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