Last week, we discussed commodities, what drives their prices and how they can indicate investable opportunities.
This week, we’re going to apply that lesson. But first, a refresher:
- Commodity prices are typically driven by inflation.
- Other circumstances (e.g., war, government incentives, crop diseases, etc.) also impact prices.
- Understanding that price action can help identify promising investments.
In your last issue, we used record-high orange juice futures (up 96% year over year) as an example. Today we’re going to expound on that and look at how to …
Invest in Human Necessities
There are three groupings of basic needs for survive:
- Food and water.
- Shelter and protection.
- Love and companionship.
There are obvious ways to invest in shelter. Physical property. Real estate investment trusts (REITs). Crowdfunded real estate.
And sure, you can buy companionship, too. But it’s rarely legal outside of Vegas, so we suggest leaving that to Charlie Sheen and Tiger Woods.
But using food commodity prices to understand how to invest in consumer staples is a no-brainer.
Since the Inflation Reduction Act was signed last August, consumer prices are down by 67%.
However, one area where it’s lingering: food. Food inflation’s seen a year-over-year increase of 5.75%.
So with last week’s news of record-setting orange juice prices in conjunction with sticky food inflation, there’s an opportunity in a segment of consumer staple stocks.
4 Leveraged Stocks
1. Coca-Cola (KO): Despite being synonymous with its namesake soft drink, the company owns Simply Orange and Minute Made, two of the largest orange juice brands.
Coca-Cola’s a Dividend King, having increased its yield 61 years consecutively while currently paying 2.96% quarterly. The stock’s up 2.46% over the past month and 33% over the past five years.
With shares priced around $62, it’s trading an attractive price-to-earnings (P/E) ratio of 25.54. The Wall Street Journal gives it a median one-year price target of $71.
2. PepsiCo (PEP): Pepsi’s also famous for its carbonated beverage, but it owns Tropicana and is the world’s largest producer of branded fruit juices.
The recently-crowned Dividend King’s raised its yield 50 years consecutively and now pays 2.69% quarterly. Its P/E ratio is 32.99. Shares are up 1.34% in the past month and 62% over the past five years.
With shares priced at $188, the Wall Street Journal gives it a median one-year price target of $203.
3. Kroger (KR): America’s second-largest grocer with 2,796 locations, Kroger also owns Ralphs, Fred Meyer and a half-dozen other local supermarket brands.
Charlie Sheen and Tiger Woods might have trouble purchasing “companionship” at any of them, but they’re all replete with orange juice.
Shares are up 2.9% over the past month and 63% over the past five years while paying a strong 2.35% dividend yield. At $48, the stock trades at a very attractive P/E ratio of 14.03, and the Wall Street Journal gives it a median one-year price target of $52.
4. Ingles (IMKTA): People love Appalachia for its verdant mountains and famed whiskey, but also for its 198 Ingles Markets locations. The stock trades at an absurdly cheap 6.55 P/E ratio and pays a modest 0.77% dividend yield.
Shares are up 2.26% in the last month and 194% over the past five years. Currently trading at $85, the Wall Street Journal doesn’t offer any price targets at this time.
Bonus: Invesco DB Agriculture Fund (DBA): Last year, this “breakfast commodities” exchange-traded fund (ETF) debuted, offering investors exposure to commodity futures without having to directly invest in them.
DBA has an expense ratio of 0.7%, which is softened by its modest 0.44% dividend yield. And while orange juice isn’t among the fund’s agricultural commodity holdings, coffee, sugar and corn are.
Shares are up 2.35% over the past month and down less than 1% since its inception in June 2022. The ETF hit its 52-week high in late July and is trading slightly lower than that at $21.79.
We Asked ChatGPT …
How will higher orange juice prices affect investors? Here’s what AI had to say:
“Investors who have stakes in orange juice production companies or retail chains that sell orange juice products may benefit from the higher prices. Higher prices for orange juice can lead to increased revenues and potentially higher profits for these businesses, which can be reflected in their stock prices and dividends. Investors should be aware of how global trends in commodity prices, including orange juice, can impact overall market conditions and factor that into their investment strategies.”
TL;DR
Inflation’s down, but food prices remain elevated. Orange juice futures just hit a record high, and a few stocks could see outsized profits. Buy food stocks. Seek shelter. Leave love-for-hire to celebrities and pro athletes.