The End of Bacon?

• This story got my attention
• How much do I like bacon?
• One company that will profit from higher bacon prices

I hope your holiday season is going well - but I'm going to get right into it.

With everyone worried about New Year's Eve plans, very few people are thinking about the markets. So we have an edge.

To that end, I stumbled on a story this morning that sounded every alarm in my investor repertoire.

The Wall Street Journal published a story about a lack of trading in pork belly contracts on the Chicago Mercantile Exchange (CME). According to the story, the CME was once dubbed, “the house that bellies built.” To the uninitiated, pork bellies are basically just frozen slabs of bacon.

I don't know about you, but even in this world of extremely health conscious consumers, low-fat diet gurus and less-meat more-vegetables mantras, I have no illusions about the future of bacon in the diet of Americans.

To be clear: I'll be eating bacon with my eggs, on my cheeseburgers, and wrapped around anything even if “scientists” link it to every disease known to man.

Bacon is just that good.

I've plotted a chart of how much I like bacon vs. how much I don't care about how bad it is for me:

You can see that over time, my taste for bacon has only improved as I've learned of its ill health effects.

Slightly off topic, but I received some kudos on the content charts from reader WH who wrote in to say:

“Scottrade (among others) plays with their black and dark blue lines, which are virtually indistinguishable (especially with my failing eyesight these days!), but you use black and red/green, which are very legible.

Merv Griffin said it best: Little things mean a lot.”

Thanks for writing in WH. I do take pride in the clarity of my charts. I know that charts which are easy to read and understand are always more helpful.

But back to bacon:

I'm excited about this bacon headline in The Wall Street Journal not strictly because I'm easily excited about bacon, but rather because it reminds me of the now infamous BusinessWeek headline in August, 1979 which declared “the death of equities.”

Of course, BusinessWeek called the actual stock market bottom a bit prematurely, as it actually bottomed in 1980, and then again in 1982. But had you been adventurous enough to use this proclamation as an entry point into the broad market, you would have been handsomely rewarded over the next 20+ years.

So if bacon is having its death proclaimed by the mainstream media in a similar way, it could be a sign to start investing in bacon. Clearly something is amiss if pork bellies - once one of the most important components of the CME, and still an extremely popular food stuff - are now being ignored in the world's largest commodity market.

In fact, pork belly prices are only twice as expensive as they were 30 years ago.

I can't think of anything else in this world, commodity or not, that's only twice as expensive as it was in 1980.

So, how can we invest in pork bellies?

I don't like to over think these things too much. If we're right on the trend, every decent pork producer in the stock market should benefit. So, for me, the easiest way to profit would be to buy the biggest, cheapest pork producer.

And today, that honor would fall to Tyson Foods TSN.

Obviously, Tyson doesn't just produce bacon, but they do produce a good chunk of the bacon in the United States. The stock is also selling for under 10 times earnings - which is significantly less than their competitors.

They have little debt, a diversified lineup of non-bacon products and they pay a modest 0.9% dividend.

I think we'll see some very nice price appreciation in pork bellies, and bacon producers like Tyson that have strong pricing power and good brand recognition.

Take a look at Tyson Foods and let me know what you think: editorial@resourceprospector.com.

Good investing,

Kevin McElroy

Editor

Resource Prospector

disclosure: no positions