As an investor, one of the most important things you can do is distinguish short-term disruptions from long-term trends. So many investors focus on – and overreact to – the short-term, which can create a significant discrepancy between a company’s stock price and its long-term prospects. Those focused on the long haul can reap the benefits.
That sort of disconnect appears to be going on right now in the food industry. Over the past year, food prices are down close to 20% across the globe, according to the Food and Agriculture Organization of the United Nations. (US grocery shoppers might not have noticed it, because the cost of raw food products is only a small piece of the prices of the processed foods that we Americans love to buy.)
Part of the decline is due to fears about China’s slowing economy, and part of it is due to the end of the U.S. quantitative easing programs. Because the U.S. ended its QE efforts at a time when many other countries are still in the middle of their money printing, the dollar has strengthened dramatically – and commodities, like food, that are demarcated in dollar values have seen their prices tumble. That obviously impacts the profits of companies selling food.

GROSSDERSCHAU, GERMANY – AUGUST 14: In this aerial view a combine harvests summer wheat at a cooperative farm on August 14, 2015 near Grossderschau, Germany. (Photo by Sean Gallup/Getty Images)
Russia’s embargo of US products has also impacted prices. But the Russia issues, China’s slowdown, and the strengthening dollar are all relatively short-term factors – as are bird flu fears that have hurt many poultry producers. Do we really think, for example, that China’s slowdown means a long-term or permanent decline in food demand from China residents? That seems highly doubtful.
On the contrary, a number of long-term factors indicate that food prices are likely to go much higher over a number of years. Top strategist Jeremy Grantham has spoken at length about this, and he did so again in GMO’s second-quarter letter to investors. “The world’s population continues to grow, and the increasing middle class of the emerging countries, especially China, is rapidly increasing its meat consumption. Both trends put steady pressure on our grain and soy producing capabilities at a time when productivity gains have been irregularly slowing for several decades and show every sign of continuing to slow,” Grantham wrote. “Both overland and underground water supplies are stressed. Weather for farming becomes increasingly destabilized with increased droughts and radically increased flooding events. Flooding particularly increases soil erosion, which still continues at 1% a year, close to 100 times natural replacement rates. Insects and weeds are apparently becoming resistant to chemicals faster than chemists can respond.”

 Grantham sees all of this leading to higher food prices over the long-term. While food companies’ profits depend on a number of factors, higher food prices should in general help food producers. Investors, however, have been more focused on the shorter-term issues I mentioned above, causing many food-related stocks to fall in recent months. That should be creating long-term opportunities, and investors who can identify fundamentally sound food stocks have the chance to make some nice gains over the long haul.
I recently used my Guru Strategies, investment models that are based on the approaches of Warren Buffett and other great investors, to find some food-related stocks that fit the bill. Several that could benefit from higher prices, or at the very least pass costs on to consumers, caught my eye. Here’s a look at a handful of them, keeping in mind that I always invest in a properly diversified portfolio.
Cal-Maine Foods: This egg producer sells its eggs in the southwestern, southeastern, mid-western and mid-Atlantic regions of the United States. The $2.7 billion market capitalization firm has taken in about $1.8 billion in sales over the past 12 months.
The model I base on the writings of hedge fund guru Joel Greenblatt is particularly high on Cal-Maine. Greenblatt’s approach is a remarkably simple one that looks at just two variables: earnings yield and return on capital. My Greenblatt-inspired model likes Cal-Maine’s 16.5% earnings yield and 48.7% ROC, which combine to make the stock the 15th best in the entire U.S. market right now, according to this approach
Cal-Maine also gets strong interest from my Peter Lynch-based model, which likes its 22% long-term earnings per share growth rate, 9.8 price/earnings ratio, and 0.44 P/E-to-Growth (PEG) ratio.
Sanderson Farms: Based in Mississippi, Sanderson is the US’s third-largest poultry producer. Shares of the $1.5 billion market cap firm have struggled lately (perhaps because of bird flu fears), but the stock gets high marks from the strategy I base on the writings of Forbes columnist Ken Fisher. A few reasons: Sanderson’s 0.52 price/sales ratio, its 16.6% long-term inflation-adjusted EPS growth rate, and its 1% debt/equity ratio.
Sanderson also gets high marks from my Peter Lynch-based model, thanks to its dirt-cheap 5.4 P/E ratio and 0.3 P/E-to-Growth ratio, and gets strong interest from my Greenblatt-based model, which likes its 32% earnings yield and 40% return on capital.

Fresh Del Monte Produce: Del Monte is one of the world’s leading producers, marketers and distributors of high-quality fresh and fresh-cut fruit and vegetables, and it produces and distributes prepared fruit and vegetables, juices, beverages and healthy snacks in Europe, Africa, the Middle East, and the countries formerly part of the Soviet Union.
Del Monte ($2.2 billion market capitalization) gets some interest from my Fisher-based model, which likes its 0.54 price/sales ratio. The strategy also likes Del Monte’s reasonable 12% total debt/equity ratio, and its positive free cash per share ($0.95).
Sanfilippo & Son: This nut and snack food processor ($600 million market capitalization) has increased EPS in each year of the past half-decade, one reason it gets high marks from my James O’Shaughnessy-based model. O’Shaughnessy also looked for a key combination of characteristics in growth stocks: momentum and value. Sanfilippo has a red-hot 92 relative strength over the past 12 months, showing strong momentum, but it remains cheap, with a 0.65 price/sales ratio.
Seaboard Corporation: This Kansas-based company produces premium pork products, operates a containerized shipping service between the United States, the Caribbean Basin, and Central and South America, and runs Commodity Trading and Milling, an international grain processing and trading business with primary operations in Africa, South America, and the Caribbean. The firm has a $3.7 billion market capitalization and has taken in more than $6 billion in sales over the past 12 months.
My Benjamin Graham-inspired model is high on Seaboard. Graham, known as the “Father of Value Investing“, was a very conservative investor, and this approach looks for companies with good liquidity (current ratio of at least 2.0) and a strong balance sheet (long-term debt should not exceed net current assets). Seaboard has a 3.2 current ratio, and about $1.4 billion in net current assets vs. zero long-term debt. It also trades for just 13.1 times three-year average earnings, and just 1.31 times book value, demonstrating the kind of value that the Graham-based model approves of.