Monday, August 18, 2008



CNBC included a segment after today’s close featuring food company analysts from Sanford Bernstein and D.A. Davidson. As do many of you, I have CNBC on during the trading day, but have the volume muted and/or go about my business while CNBC is on and hence I don’t catch everything. Usually, when a segment comes on that looks like it will be especially interesting, I turn on the volume and almost invariably have missed the speakers’ names. Unless that speaker is known to me either through repeated appearances in the financial media, personal acquaintance, or friendship, I have no idea who is speaking. Given the tone of many of my commentaries, that is probably a quite fortunate thing, but that is another issue.

In this instance, the Bernstein analyst was trumpeting the food stocks. The stated reason for her enthusiasm is that the food companies have gotten religion and are hedging their exposures to higher food prices.


This seems like an awfully peculiar argument at this point in the commodity cycle, or at any time, for that matter. What if the food companies are not hedging with any degree of acuity and are doing so at an especially poor time? One could make the argument (and I am not; no predictions on commodity prices at this time) that, depending on the method of hedging these companies are employing, they could be locking in what, in retrospect, might look like historically high prices. If this were to be the case, companies’ hedging their exposure to commodity prices would be a very good reason NOT to buy the stocks.

The alert interviewer, Maria Caruso-Cabrera, brought up a very similar point when she asked the Davidson analyst how we could know that the food companies would hedge skillfully and effectively. He replied that hedging is nothing new for the food companies, stating that they have been doing so for years.


If indeed the food companies have been hedging for years, and I have no reason to think they haven’t been, why are those companies citing rising commodity prices as a reason for their earnings’ being under pressure (to put it politely)? Apparently, the food companies, taken as a whole, are not all that skillful in hedging. Consequently, the “buy the food companies because they have gotten religion on hedging” argument looks weaker still.

I don’t write this to comment on food companies. I have traded several through the years, most recently Lifeway Foods (LWAY), a very small cap stock that has treated me very well and in which I now have only a very small position due to my fervent belief in the old adage that no one ever went broke taking a profit. But positions in food stocks have been rare in either my investment or trading portfolio, and LWAY was a special situation rather than a bet on the food stocks. The point is that I have no special expertise in food companies, other than my rather prodigious (and increasingly obvious) enthusiasm for virtually any of their products.

My object in writing this post, then, is not to comment on food stocks but, rather, to point out that the investment world is given to fad chasing. One of those perennial fads is “hedging.” With commodity prices (until recently) soaring toward the stratosphere, those who hedged effectively, most famously Southwest Airlines, were awarded financially and with the adulation of their peers. So everyone wants to get on the bandwagon. Furthermore, investment people want to sound smart in order to justify their (in most, but certainly not all, cases) grossly out of proportion to their value pay packages, so they like to throw around buzzwords like “hedging.” But saying that one engages in hedging is like saying that one intends to invest in mutual funds. It means nothing until one gets more specific, does so skillfully, and has a bit of luck with one’s timing.

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