Diving market prices among food stocks may be one of the toughest challenges facing President-elect Donald Trump when he assumes power on Jan. 20. The always-outspoken real estate mogul ran a campaign that spoke to the “Rust Belt” electorate. Tough talk against Washington politics, foreign business deals, even the U.S. Federal Reserve gave Trump enormous street cred among blue-collar workers.
However, that rhetoric was apparently designed for manufacturing industries. Agriculture, on the other hand, was given the cold shoulder.
True, “Farmers for Trump” was one of several social groups that mobilized for the now President-elect. There was even a heartwarming story of how Trump came to the rescue of a farming family struck with senseless tragedy. But the problem remains that economic policy can often turn into a game of Whac-A-Mole. Expending effort to solve one crisis leaves another crisis exposed.
For food stocks and the broader agro sector, a hard line on immigration and Fed policy can lead to undesirable consequences.
For Donald Trump and the Republican machinery, it was simply a numbers game. It has been well-documented that the number of farms across America is declining. To no one’s surprise, farming demographics are severely challenged. According to government census data, the average age of a farmer is 58.3 years. Additionally, one-third of farmers are over 65 years old.
Bluntly stated, their political leverage is low. To borrow a tagline from “The Apprentice” show: it’s nothing personal … it’s just business.
The problem of course is that it is personal. Food stocks are getting crushed, farming communities are dwindling, and there’s a labor shortage that will be exacerbated should Trump impose tough immigration policies. The American consumer is loving the low food prices, and may even attribute some of the cost savings to the Republican ascendancy. But in order to deliver these savings, food stocks have to cut heavily into their profitability margins.
Some companies have obviously adapted to the deflationary environment better than others. However, now that the riotous 2016 election has finally concluded, the deflation will likely worsen next year. The U.S. Dollar Index is at multiyear highs, and Trump’s proposed policies make the greenback quite bullish. If anything, him ranting and raving at Fed chair Janet Yellen might be good for a few basis points.
It’s just a very bad time for food stocks, and there are a few names you definitely want to avoid.
Food Stocks to Avoid: Tyson Foods (TSN)
Even against embattled food stocks, Tyson Foods, Inc. (NYSE:TSN) is having an absolutely rotten time. TSN greeted the beginning of the holiday-shortened week with a devastating loss of more than 14%. The 2% gain the following day wasn’t a consolation — it was an insult.
Surprisingly, TSN is still one of the brighter names in the markets, with year-to-date performance of nearly 10%. However, that bit of good news will likely sour in the months ahead.
TSN was of course massacred by a poor showing for its fourth quarter of fiscal year 2016 earnings report. Against a consensus forecast of $1.17, the meat producer could only muster 96 cents. Revenue also dropped more than expected, registering $9.16 billion against a consensus estimate of $9.38 billion. But the worst part about it was that TSN lowered its full-year guidance for 2017 to range between $4.70 to $4.85. This is below the consensus target of $4.98, with meat price deflation pressuring sentiment.
Some might have a reactionary contrarian attraction to Tyson. My idea, however, is to stay away. There’s just too much ugly written into food stocks.
Food Stocks to Avoid: Hormel Foods (HRL)
At first glance, Hormel Foods Corp. (NYSE:HRL) might be viewed as one of the food stocks that’s going to make it in 2017.
In some ways, it’s the opposite of Tyson. HRL had a bit of a slip-up in the wake of its competitor’s collapse. However, Hormel rebounded 24 hours later, helped by tremendous intraday momentum. But viewing Hormel strictly on the basis of the most recent trading sessions would be a mistake.
There were definitely aspects of the Q4 report that heavily favored HRL stock. First and foremost is its consecutive streak of record of record earnings — 14 in a row, according to the Wall Street Journal. Hormel is also making bank off of its popular brands like “Jennie-O” and “Spam.”
Overall, HRL has a very positive outlook for 2017, with one of the reasons being an improved Chinese market. But for all this good news, the company is not showing results where it matters for shareholders. On a year-to-date basis, HRL stock is down 11%. Since peaking in mid-February, Hormel has given up more than 18% of market value.
Despite the strong implications of its earnings report, Hormel is surprisingly down 8.6% for November.
Moving forward, it’s hard to see HRL doing as well as they think they will, given the economic and political challenges.
Food Stocks to Avoid: Pinnacle Foods (PF)
The inclusion of Pinnacle Foods Inc. (NYSE:PF) as one of the food stocks to avoid may confuse some investors. With a YTD performance of nearly 18%, PF is not only one of the best food manufacturers, it also can be considered one of the best investments overall. However, it’s important to note that bubbles usually aren’t labeled as such until they pop.
This is not meant to imply that PF is in a bubble. But I do think that some of the characteristics of a bubble — namely, the unsustainable aspect — is a relevant warning for Pinnacle.
Now, every corporate executive will put on a brave face and spout prepared talking points, largely because they have to. But for PF and food stocks in general, there’s no need to play complicated mind games. Donald Trump won. That means the dollar will stay strong and interest rates will be northbound. Ultimately, that’s unattractive for consumer staples — and food stocks definitely fall into that category.
PF might be able to pull off the recovery. However, that’s a mighty big risk for a very small reward.
As of this writing, Josh Enomoto did not hold a position in any of the aforementioned securities.