Beef Prices: Who Benefits?
So far, beef prices have been good for packers, who can raise wholesale prices to distributors to recoup the costs they fork out to the ranchers and feedlots. Case in point,Hormel Foods Corporation (NYSE:HRL) is up 20% from one year ago.
But the cost of beef has not been so good for restaurants like Ruth’s Hospitality Group, Inc. (NASDAQ:RUTH), whose stock is almost 8% lower than it was at this time last year. Likewise, Texas Roadhouse (NASDAQ:TXRH) and Bloomin’ Brands, Inc. (NASDAQ:BLMN) — the company behind Outback Steakhouse — have watched their stocks fall or stay flat.
However, now isn’t a good time to buy restaurant stocks in anticipation of their recovery. The best buying opportunities will come when the stocks reach their lowest point, perhaps as early as next year. At that point, restaurants will begin to work their way out of the doghouse.
The smart investor will stop by restaurants occasionally over the next few months to check the menu prices, as well as the size of the crowd. When patrons get used to paying more for smaller portions, restaurant traffic will increase, as will their profits.
But even when the price of beef falls, many restaurants won’t lower their prices, or increase their portions, using the lower costs as an opportunity to increase their profit margins. At that point, stocks will take off. It may leave patrons bitter, but it will make investors happy.
So in the meantime, my recommendation is that you still have time to catch a ride on the money-making packing plants. As I mentioned, Hormel is up 20% in the past year. Tyson Foods, Inc. (NYSE:TSN), another leader in the meat-packing industry, is up 28%. Their stocks will remain high as long as beef prices are elevated, so you’ll have to keep an eye on your investment in relation to the price of beef. Once they peak, it will be time to exit.
Then, in about a year, it’ll be time to get in on the beef-loving restaurants.
This article is brought to you courtesy of Chad Shoop.