Visit your childhood home, and you might find the back yard smaller than you remember it. Grab a familiar package of food today, and it might also seem smaller. But while the yard is probably the same size it always was, that package of chips or tuna probably has shrunk. That's a bummer for consumers, but it can be a boon to investors.
Prices generally rise over time -- that's an economic fact of life. In response, companies gradually raise the prices they charge us. However, prices for many commodities have recently surged so dramatically that companies incorporating those items in their wares aren't comfortable hiking prices enough to cover those increases. Thus, many companies are quietly shrinking the size of their products -- sometimes in tandem with price increases.
Lumber prices have nearly doubled over the past year, but Procter & Gamble
This situation stinks for those who buy various foodstuffs, but it's good news for investors, since smaller portions can help a company to boost its profit margins. Even if commodities rise a lot, profit margins won't take as big a hit as they would have, had products stayed the same size.
Ketchup purveyor H.J. Heinz
When commodities surge so strongly in value, it can be hard for companies to keep up -- but they do what they can to minimize their pain. More happily for investors, commodities tend to be volatile. If they fall just as sharply in value, don't expect food companies to quickly cut their prices. The higher costs and smaller packages are likely to stick, plumping up bottom lines.
When you consider that many of these products are huge sellers, bringing in more than $1 billion apiece annually, it's clear that a relatively small price hike or portion reduction can have a huge effect on the bottom line. Such shrewd moves can make already compelling stocks even more appealing.
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Longtime Fool contributor Selena Maranjian owns shares of PepsiCo and Procter & Gamble, but she holds no other position in any company mentioned. Click hereto see her holdings and a short bio. The Motley Fool owns shares of PepsiCo. Motley Fool newsletter services have recommended buying shares of PepsiCo, H.J. Heinz, and Procter & Gamble, as well as creating a diagonal call position in PepsiCo. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.