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Why This Spice Stock Could Benefit From Higher Energy Prices

Key Points

  • Home heating costs are expected to jump this winter.
  • If there's less disposable income, cooking at home could be in vogue once again.
  • After underperforming the market so far in 2021, McCormick could be a great hedge to the rise in energy prices this winter.

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Energy prices are up and if that stretches budgets this winter, there's a spice stock that could be a winner.

Energy prices are going up and that could lead to high heating bills this winter. In this episode of "The 5," Motley Fool contributors Travis Hoium, Jason Hall, and Demitri Kalogeropoulos discuss why McCormick (MKC -0.57%) could be a winner if people forgo restaurants for more meals at home. This segment was recorded on Oct. 14, 2021.

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Jason Hall: Awesome. Here's the one that's driving most of the big financial headlines today and it's energy prices. Saw a piece in The Wall Street Journal today talking about natural gas prices in particular. There are already at some of the highest levels we've seen in a number of years, the levels that we're seeing. I'm actually going to pull up a chart and show it, if I can find the right chart. Here we go.

We've just seen natural gas prices just basically run-up. I don't know really, pretty much all year. This little peak we saw right here, this is just as one of those things that sometimes happens, we see these weird little one or are two-day peaks. But you see energy prices guys have just been heading up all year. It's not uncommon to get spikes in the winter months. That's not uncommon. But to see there's just protracted run-up in energy prices, particularly in natural gas prices, is not something that we've seen in this sort of a sustained way in quite some time.

Now, we've been talking a lot about inflation, we talked about it yesterday the Social Security Administration's COLA increase is going to be like over five percent, the largest increase in like 50 years. Inflation is a real thing and energy inflation is obviously a real concern. The US Energy Information Administration said that this winter, even if it's 10 percent warmer than usual, the average consumer that uses natural gas for heat is going to see their bill go up 22 percent. That's if it's warmer. If it's colder, guys, hold onto your wallets.

There's a two-parter here. The first one is a bit of a reminder that traditional hydrocarbons are still around, they're still pretty important. The first part of the question, does this make oil and gas any more interesting or compelling to you as an investor? Part two, maybe related to part one, that's up to you, guys. What's the stock that you like for the winter chill. Demitri, you want to kick us off?

Demitri Kalogeropoulos: Sure, Jason, wow. I looked at that article you mentioned too like you said, that 22 percent being the low-end is amazing to me. I think it said something like 45 percent if we get a colder winter than normal, some of those heating bills can be up in that 35 or more percent higher. Just amazing. But your first question, yeah, it does. Oil and gas is not an area that in my wheelhouse that I follow too closely. But this does pick my interest because we talked about pricing power and the ability to pass on those extra costs. I know a lot of these oil and gas providers and lot of these electricity and energy providers have basically monopolies over their little areas, which brings a lot more regulation. But since their products were just tied to the price, there's not really, also because of that monopoly situation, it's not so much a big risk for them that they can't pass along those extra prices. It's a reminder that those can be good parts of your portfolio in an environment where prices are going up.

The second part of your question about our stock I'd like for the winter, maybe a cold winter ahead. Does Mike sound like a little bit of a stretched? But I like McCormick.

Jason Hall: I love this by the way. I just want to say I love this.

Demitri Kalogeropoulos: That's just because maybe they have some soup products, but McCormick is just an attractive stock. It's down. I just looked, let's say it down 16 percent so far this year compared to 18 percent increase in the stock market, which I don't think is deserved. The company just reported five percent organic sales growth, which is faster than Wall Street was expecting and just been growing a lot.

It was an attractive business before the pandemic. But since the pandemic, obviously, there has put a lot more focus on eating at home. That demand hasn't dropped. I'm thinking of you're at home or you're cooking at home and maybe some of your budgets, you don't have as high of a budget to go out to restaurants as much with energy taking up what might be a huge proportion of a lot of people's budgets. Just, I think, there's general and just a lot of demand for McCormick's spices and fully made products, and they're going to be raising prices.

Part of the reason why the stock is down a little bit is, I think Wall Street's nervous about McCormick being able to raise its prices, talking about price increases and they're rolling those out right now through the winter months too. But I don't think they're going to have any trouble doing that. They've been pushing into the more attractive margin profiles. Foods like hot sauces are just not Cholula hot sauce. They've got those French's and Frank's condiments, and these are areas that people are a lot less likely to trade down on and they're going to be paying those higher prices. I think the winter could be a good time to own McCormick stock.

Jason Hall: Yeah, and I think it's one to keep owning too. Just because this is a fun chart we've never, ever shown before. It's our McCormick discount to Henry Hub Natural Gas Price arbitrage. You like that, Travis?

Travis Hoium: That's good. What's the last time you ever check the price of spices before you bought them? I mean, isn't that something that you're just like, we've got to have this and I need it in an hour.

Jason Hall: I need chili powder. There's chili powder.

Jason Hall: Now, absolutely. I think, Demitri, I think they do have maybe better pricing power than Wall Street realizes.

Travis Hoium has no position in any of the stocks mentioned. The Motley Fool recommends McCormick. The Motley Fool has a disclosure policy.

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