A price pop for Corn Pops may make Kellogg a tasty buy

The Stock: Kellogg Co.

Recent price: $53.42

The Trend

Major spells of food inflation can spur social unrest. They also affect the valuations of companies in the global food industry.

Casual dining restaurants are among the companies that feel the squeeze from rising agricultural prices. When consumers last confronted rising food costs three years ago, dining stocks such as Ruth's Hospitality Group Ruby Tuesday Chipotle Mexican Grill Texas Roadhouse and units of Keg Royalties Income Fund struggled. Although last week saw a rise in many U.S. restaurant stocks, the trend since late 2010 has been deteriorating.

Stocks of major food processors are a different story. Some of these producers have commodity hedging programs and more room to pass along higher input costs. Consider the surprisingly strong results of meat producer Tyson Foods announced late last week. Its shares are categorized as newly Stock Trends Bullish and are a current stock pick.

The Trade

In 2007 and 2008, commodity price inflation was acute. The U.S. consumer price index for cereals and bakery products rose about 15 per cent, but the stock of Kellogg Co., the world's largest cereal maker, outperformed the broader stock market during most of the period. Its shares have been struggling since last May because of competition and product recalls, but the recently announced fourth-quarter earnings suggest a corner has been turned.

Kellogg's stock advanced 5.8 per cent last week, and turned to Stock Trends Weak Bearish - an indicator that points to a move above trend line resistance. While consumers may be faced with higher prices for their granola, Corn Pops and Pop Tarts, shareholders should be encouraged by improved revenue expectations. The company plans more product price increases in 2011, on the order of 3 to 4 per cent. Trend-following investors will like the stock's aggressive move above $52, with trading volume in the stock last week lifting 60 per cent higher than its weekly average of the past two quarters.

The Upside

Although the current rally may only lead to the stock regaining its 2010 high of $56, shareholders can anticipate market outperformance over a longer period. Recent analyst upgrades also suggest this trade can offer more.

The Downside

The 40-week moving average trend line sits near the $51 mark. A drop below that level suggests it's time to exit this trade.

Skot Kortje has been analyzing stock market trends for 15 years using trend analysis. For more, go to stocktrends.ca.