PPI Report Holds Investment Ideas

The latest producer price index report (PPI) was released by the Bureau of Labor Statistics on Tuesday, with numbers falling 1.4% compared with forecasts for a decrease of 0.3%.

Fellow RealMoney contributor Tony Crescenzi says the latest PPI report should be tossed because the benign headline reading will almost certainly be reversed in the months ahead, owing to the surge in energy costs that has occurred of late.

I say, not so fast! If prices are rising, that means some companies out there are likely to see better profits. Before tossing out the report, I'm betting we can figure out who a few of them will be.

The Bureau of Labor Statistics, which prepares the PPI report, provides detailed information on an industry basis. The problem is figuring out how to find it on their Web site. Starting at the PPI homepage, I scroll down to the headline that says "Get Detailed PPI Statistics," then click on "industry data."

You can then pick out which industries you want to see (I pick 'em all) and click "retrieve data." Then I select "more formatting options" and click on the boxes for 12-month percent change, all years, and include graphs. Once I hit "retrieve data" again, I have what I'm looking for: graphs that make it easy to tell which industries are gaining or losing their pricing power.

First up is the fruit and vegetable canning industry. At 5.3% year-over-year inflation, pricing is clearly better than normal. It is down from a recent peak but still looks to be generally in a rising trend.

Fruit and Vegetable Canning Industry Prices

Source: Bureau of Labor Statistics

Possible plays on this industry include can makers such as Ball Corp. (BLL - commentary - Cramer's Take), Crown Holdings (CCK - commentary - Cramer's Take) or Silgan (SLGN - commentary - Cramer's Take). Or you can go to the food processors such as Campbell Soup (CPB - commentary - Cramer's Take), Del Monte (DLM - commentary - Cramer's Take), Hain Celestial (HAIN - commentary - Cramer's Take) or H.J. Heinz (HNZ - commentary - Cramer's Take).

Looking better still are industrial valves, up 9.3% year over year against tough comparisons.

Industrial Valves Industry Prices

Source: Bureau of Labor Statistics

Some of the industrial valve makers include Flowserve (FLS - commentary - Cramer's Take), Crane (CR - commentary - Cramer's Take) and Curtiss Wright (CW - commentary - Cramer's Take).

But enough with boring "old" industries. How about tech? It is seldom that tech prices actually increase, but sometimes they decline at a slower than usual pace, and that can provide a similar opportunity. That may be the case right now with computer storage devices.

Tech Industry Prices

Source: Bureau of Labor Statistics

Last month's 2.9% decline from last year was the smallest price drop on record for this industry, and the ongoing consolidation may help the trend continue. There are plenty of ways to play this one, including Brocade (BRCD - commentary - Cramer's Take), EMC (EMC - commentary - Cramer's Take), Iomega (IOM - commentary - Cramer's Take), Hutchinson (HTCH - commentary - Cramer's Take), Quantum (QTM - commentary - Cramer's Take), SanDisk (SNDK - commentary - Cramer's Take), Seagate (STX - commentary - Cramer's Take) and Western Digital (WDC - commentary - Cramer's Take).

By contrast, semiconductors are experiencing the worst pricing on record.

Semiconductor Industry Prices

Source: Bureau of Labor Statistics

That could be the signal for a contrarian play (I happen to believe the worst will soon be over for semiconductors) or possibly just an excuse to avoid the group for a while.

The PPI clued me in to the opportunity in railroads a year before Buffett bought in. I hesitate to bet against him, but it looks as though the industry's price increases have ground to a halt.

Railroad Industry Prices

Source: Bureau of Labor Statistics

If you have the guts, I'd count this as bad news for Burlington Northern (BNI - commentary - Cramer's Take), CSX Corp. (CSX - commentary - Cramer's Take), Norfolk Southern (NSC - commentary - Cramer's Take) and Union Pacific (UNP - commentary - Cramer's Take).

Finally, wired telecommunications saw pricing decline for years after the 1996 Telecom Act, but recent consolidation is allowing the companies in this sector to raise prices again.

Wired Telecom Industry Prices

Source: Bureau of Labor Statistics

Winners here would be CenturyTel (CTL - commentary - Cramer's Take), AT&T (T - commentary - Cramer's Take), Verizon (VZ - commentary - Cramer's Take) and Embarq (EQ - commentary - Cramer's Take).

By my count, that is 26 potential investment ideas. I'll take that over tossing the report any day.

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At the time of publication, Trent was long Semiconductor HOLDRs, although positions may change at any time.

William A. Trent, CFA, is a freelance equity analyst based in the New York metro area. He has been an equity analyst since 1996 and is co-author of Understanding and Evaluating Prospectuses, Offering Documents, and Proxy Statements. Under no circumstances does the information in this column represent a recommendation to buy or sell stocks. Trent appreciates your feedback; click here to send him an email.