Mad Cow Scare Helps Companies With Animal Homing Devices

Updated from 8:25 a.m. EST

Government efforts to recall beef from a processing plant where an animal with mad cow disease was slaughtered continue to be hamstrung by the speed with which beef is distributed in the U.S. Several companies' shares were bid up Monday on grounds that their technology could resolve the problem in the future.

Eight states and Guam are believed to have received beef from the plant in Washington state where the infected cow and 20 others were turned into hamburger on Dec. 20. The states are Alaska, California, Hawaii, Idaho, Montana, Nevada, Oregon and Washington.

Investigators are increasingly fearful the hamburger has already been eaten, although experts say there's very little chance any infected matter reached the public because of federally mandated precautions taken at the slaughterhouse. Over the weekend, the U.S. Department of Agriculture said it now believes the infected cow's herd came from Alberta, Canada, and that the 6-year-old animal was probably infected before being transported to the U.S.

Because tracking the infected cow back to its birth herd has been so difficult, the USDA said that an electronic tracking system to better control the spread of outbreaks is already in the works. Predictably, investors made speculative trades Monday into a variety of companies that provide services to the meatpacking industry.

Notable movers included Digital Angel ( DOC) and Applied Digital Solutions ( ADSX), both of which make electronic tracking devices that are implanted in animals. Applied Digital Solutions, which owns 74% of Digital Angel, rose a penny, or 2.3%, to 44 cents, while Digital Angel, which trades on the American Stock Exchange, rose 26 cents, or 6.6%, to $4.21.

While these names rallied, many companies that saw similar speculation last week in the wake of the outbreak were falling, demonstrating the risk of following hot money in these circumstances. Advanced ID ( AIDO), a small company that touted a solution for mad cow disease and rose 71% on Friday, was off 20 cents, or 17.2%, to 96 cents on Monday. Similarly, agriculture testing kit maker Strategic Diagnostics ( SDIX), which has jumped nearly 20% since the outbreak, was off 32 cents, or 6.4%, to $4.69 on Monday.

At 2 p.m. EST, the Agriculture Department will hold a conference call to update the progress of the investigation, but thus far, the government has been unable to repossess a significant amount of beef distributed from the plant where the diseased animal was infected. And any determination that the cow came from Canada does little to ease concerns about U.S. herds, given the essentially unregulated flow of cattle back and forth between the two countries under various free-trade covenants.

Overseas trading partners continue to take a hard-line view on the disease, with Japanese officials saying overnight that it is still too early to lift the ban on U.S. beef imports that was imposed after the cow was detected last Wednesday. Japan imports almost $1 billion a year of U.S. beef but says it won't allow any more in until it's assured U.S. food-handling procedures are sufficient to prevent any infected meat from reaching market. Almost two dozen other countries have banned U.S. beef.

With 44,000 metric tons of beef on boats, unable to reach foreign markets because of the bans, the USDA said it was working hard to convince officials that U.S. beef was safe.

"The trade team that was dispatched Saturday has arrived in Tokyo and will be meeting tomorrow morning, Monday morning Japanese time, with the Japanese Ministries of Agriculture and Health to review the BSE situation and to continue to assure them that U.S. beef is safe," said Dr. Ron DeHaven, chief veterinary officer for the USDA.

The mad cow paranoia actually spurred interest in shares of fast-food giant McDonald's ( MCD) on Monday. Before the bell, the company's shares were upgraded by J.P. Morgan analyst John Ivankoe on grounds that the controversy could result in lower cattle prices, while the consumer reaction will likely be short-lived.

Indeed, the cost of beef is plunging, with cattle futures contracts on the Chicago Mercantile Exchange dropping by the maximum amount in every session since the discovery of the outbreak on Dec. 23. On Monday, live-cattle futures for February 2004 continued to trade under emergency rules, falling by 5 cents, the maximum allowed under the trading curbs, to 81.175 cents per pound.

In addition to lower costs, J.P. Morgan said that McDonald's shares are attractive when compared with those of its rivals.

"Beyond mad cow, McDonald's has underperformed its key industry comparables since June 30, up 9.2%, vs. up 31.1% and up 13.8%, for Wendy's ( WEN) and Yum Brands ( YUM), respectively, and up 12.5% for the S&P 500," said Ivankoe. " We encourage investors to build positions given the stock's recent pullback." (J.P. Morgan does and seeks to do business with the companies it covers in research notes.)

Both Wendy's and McDonald's said that December sales were not affected by the outbreak and fast-food stocks rallied, led higher by Wendy's, which rose 49 cents, or 1.3%, to $38.48. McDonald's, which was up 10 cents, or 0.4%, to $24.19, while Yum gained 21 cents, or 0.6%, to $33.85.

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