How to Invest in Food Stocks

Betting on Biofuels

For the most part, farmers are only in the business of planting, growing and harvesting crops. Those crops still need to be transported, stored, processed and prepared. For those steps, we turn to another set of companies, which become the intermediaries (or "middlemen") between the farms and our kitchen tables.

However, there is another factor that has breathed some fresh life and growth into this intermediary segment of the food investment chain. This is our increasing demand to create biofuels -- probably the most discussed: ethanol. The concerted effort by the U.S. Government and industry to create renewable and cleaner energy sources has made this once boring segment of the food investment chain a rising star.

So who are these rising stars? Here is a list for your investment processing:

Farm Products and Biofuels
Company	Ticker Symbol	Price 2/15/2008	2007 EPS	2008 Est. EPS
Archer Daniels Midland	(ADM)	44.13	2.37	2.77
Bunge	(BG)	103.37	6.45	6.66
The Andersons	(ANDE)	44.89	3.75	3.67
Source: Yahoo! Finance

After a feverish run over the last two years, the rate of growth in these companies may have reached a peak. Why? Growth rates are typically higher in the early part of a sector-specific growth cycle. This does not mean that we will not experience growth from this group, but rather that we have to adjust our future expectations of growth relative to the recent past. Consider the flat panel TVs and displays in the early 2000s: sales are still growing but at a slower pace.

If I had to choose one of those stocks to own, it would be Bunge. My reason: I believe that 2008 earnings estimates may be too low, as they do not reflect the company's revenue growth estimates and economies of scale.

That said, in 2008, this entire group of companies may offer more risk than reward. Again, because of the huge stock price runs they have experienced in the recent past. Furthermore, biofuels are in such demand that I would expect many other business entrants into this arena, which could provide yet unknown opportunity in the future.

A subset of companies in this part of the food chain includes fresh produce and product wholesalers. Three companies come to mind, which are worth researching:

Fresh Produce
Company	Ticker Symbol	Price 2/15/2008	2007 EPS	2008 Est. EPS
Fresh Del Monte Produce	(FDP)	32.68	2.89	3.05
Chiquita Brands	(CQB)	19.17	(0.42)	1.31
Cal-Maine Foods	(CALM)	28.92	1.66	none
Source: Yahoo! Finance

If you have any interest in these stocks, before you commit any capital , take the time to research each company on a fundamental and technical level. As always, a good place to start your research: earnings conference calls. Note that Fresh Del Monte will release its earnings and conduct its quarterly conference call on Feb. 26. This gives you ample time to do some pre-call research as described in the "Beginners Guide To Earnings Calls."

Managing the Growth and the Risk

The three categories of the food investment chain described so far represent the front end of the the chain, which happens to be the fastest growing segment of the chain. Fast growth often brings opportunities for outsized gains, but can also carry the possibility for tremendous risk, if the "wrong" stock within a sector is selected.

If you want exposure to these front end segments, a possible investment solution to this dilemma is an ETF that incorporates these segments and many of the stocks which I mentioned earlier (see "How to Outperform the Market and Manage Risk With ETFs"). This ETF is the Market Vectors Global Agribusiness ETF (MOO). The current top 10 holdings in the "MOO" represent nearly 65% of its total assets.

There is more to discuss along the investment food chain, which I will cover in the next installment of the Finance Professor. For now, here's your food investment homework: research Fresh Del Monte and tune-in to the company's Feb. 26 conference call.

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