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Capitalizing on Deflation to Drive Profits — and It???s More Than Just Oil

If you assumed that oil prices were the only culprit behind the deflation we are seeing, then you???d be missing something.

Many were ???caught off guard??? with last Friday???s Producer Price Index reading for February, which came in at -0.5% vs. expectations of 0.3%. Candidly, that surprise surprised me. While it???s hard for some to imagine, the reality is that February marked the fourth consecutive month of falling prices. That???s deflation, folks.

One of the primary drivers, of course, has been the substantial fall in oil prices, and there has been much conversation about the next leg in oil prices — especially with domestic storage looking tapped out. Increasingly, as domestic storage facilities are filled to the brim, it looks like we will be awash in supply that will at best keep oil prices low for some time or (good if you???re a consumer) push gas prices even lower. This has led to a growing number of companies, like CONSOL Energy (CNX), Noble Energy (NBL), Husky Energy (HSE), Linn Energy (LINE), BP (BP), Chevron (CVX) and others, to slash capital spending projects.

If you assumed that oil prices were the only culprit behind the deflation we are seeing, then you???d be missing something. Food prices declined 1.6% in February after declining 1.1% in January. That???s the third consecutive monthly decline in food prices.

In thinking about food price trends, I have to say I am frankly amazed at how many investors forget about the cost side of the equation. Granted, most tend to see revenue and its growth as one of the key determinants in margin and earnings leverage. You have to remember that declining costs can be a powerful contributor to the bottom line as well. I make a big deal about this as the faculty advisor for New Jersey City University???s Student Investment Management Group. We want to look at factors that influence revenues and costs, especially when both are moving in the right direction as it can lead to explosive earnings growth.

The drops in corn, wheat and soybeans mean lower costs for companies like Pilgrim???s Pride (PPC), Tyson Foods (TSN), Sanderson Farms (SAFM), Dominos (DPZ), Papa Johns (PZZA), Kellogg (K), Post Holdings (POST) and others, but it also cuts another way. Remember that, as with falling oil and gas prices, consumers benefit from lower prices, but those who depend on it as part of their revenue (volume times price!) can come under pressure. A great example when it comes to corn, wheat and soybeans is farmers and farmer income, which means the trend in those three commodities tends can be a boon or bust for Deere (DE), CNH Global (CNH) and AGCO (AGCO).

In cases such as these, I prefer to be looking at those that benefit from commodity price drop, particularly if there has been a stream of price increases. I recognized this opportunity in Starbucks (SBUX) shares in August of 2012, when I recommended Growth & Dividend Report subscribers pile into the shares. Subscribers that heeded that advice scored a hefty 40% return, including dividends, during the ensuing 18 months as the combination of prior price increases and falling input costs led to some pretty hefty margin expansion that dropped to the company???s bottom line.

I???ve just shared with Growth & Dividend Report subscribers my latest recommendation that capitalizes on many of these falling input prices. What makes it even sweeter is this after raising its dividend payments in each of the last few years, it???s on the cusp of becoming one of the Dependable Dividend Dynamo companies that increase their dividends year in, year out. Join us and get this latest recommendation now.

In case you missed it, I encourage you to read my e-letter column from last week about the Apple Watch and what it means for Apple. I also invite you to comment in the space provided below my Eagle Daily Investor commentary.

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Written By

Chris Versace is a financial columnist and equity analyst with more than 18 years of experience in the investment industry. He has been ranked an All Star Analyst by Zacks Investment Research and his efforts in analyzing industries, companies and equity securities have been recognized by both Institutional Investor and Thomson Reuters??? StarMine Monitor. He???s frequently published in The Washington Times and is a frequent contributor to the daily radio show ???America???s Morning News??? and ???America???s Radio News???. He has been quoted in the Wall Street Journal, Investor???s Business Daily, The Street, USA Today and other publications. In addition, he can be frequently seen on television???s ???Fox Business??? show.