Yahoo Finance Why the market loves food stocks right now: Morning Brief
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There is one trade being devoured by investors right now — and no, it's not shorting First Republic (FRC).
It's the food trade.
From restaurant stocks such as Chipotle (CMG) to servers of soda in PepsiCo (PEP) to hawkers of chocolate like Hershey (HSY), the market has fallen in love with food stocks. These have been some of the best-performing stocks this week.
And investors are correct in bidding these names up, judging by how the first half of the year is shaping up for the sector.
Consider some of the tailwinds for the food space:
Inflation is slowing for input costs, which is great for margins.
Resistance to rounds of price increases has been generally limited, which is also great for margins.
Recovery stories are playing out in China for multinational names such as PepsiCo.
"You may not be able to go out and get a new car," PepsiCo vice chairman and CFO Hugh Johnston said on Yahoo Finance Live (video above). "You may not be able to go out and get a really fancy piece of technology. But you can afford a bag of Doritos, or you can afford a Gatorade Zero after you workout, or you can afford an energy drink in the morning."
Good point by Hugh.
Do you ever look at how much you just spent on a bag of chips at a 7-11 or WaWa? Maybe, maybe not. But I would bet that bag of chips today is more than 10% higher in price than at this point last year. Maybe 20%, depending on the flavor.
You may not have even realized it, but the CFOs of consumer food companies did, and their shareholders are loving it. Expect more price increases from these giants this year in part because consumers don't appear to care.
Then there is another aspect of the food trade that is getting overlooked. While I will get ridiculed by my colleague Julie Hyman for this statement, I believe we are in the golden age of food innovation.
The aforementioned Hershey is selling Reese's snack cakes. Where was that 20 years ago?
Meanwhile, PepsiCo and Coca-Cola (KO) are in active rollouts of ready-made alcoholic drinks after years of avoiding the space. Beer company Molson Coors (TAP) has started to sell whiskey with success. And Conagra Brands (CAG) has made frozen food taste great for maybe the first time ever.
Then there's McDonald's rethinking how they cook a burger (thank goodness), Starbucks selling drinks with one inch of thick "salted caramel cold foam," and Papa John's launching a giant hot-pocket-like product this week that has a Doritos Cool Ranch coating.
Even my local pizza joint just started selling "hot honey" chicken pizza. I went to a whiskey distillery last week and they are serving up whiskey infused with roasted coconuts.
You may be laughing at all this as it's not similar to innovations at Tesla or Apple.
But it is in fact innovation that helps drive higher price points on food and, over time, fatter profits and stock prices. Combine that with cooling inflation, and you have one heck of an earnings power story in the food sector.
Brian Sozzi is Yahoo Finance's Executive Editor. Follow Sozzi on Twitter @BrianSozzi and on LinkedIn. Tips on deals, mergers, activist situations or anything else? Email brian.sozzi@yahoofinance.com
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