There's a valuable lesson for investors to learn from Appalachian food banks. A recent Associated Press story reported, "A surplus of diet food for the overweight has been a boon for the hungry in Appalachia. Once hot and trendy, low-carb Atkins diet foods that never got sold are being shipped to food banks.. Since September, 14 truckloads of Atkins Nutritional bars, shakes, and breakfast mixes have been sent to charities that hand out free food."
What does this suggest to us? Well, it looks like the low-carb Atkins craze may be slowing down. And that has ramifications for many of the companies we follow and invest in. Food and restaurant companies, for example, have been jumping on the Atkins bandwagon, introducing (or perhaps just vividly labeling) low-carb offerings. Those that have invested in such fare may now find themselves holding a greater supply than the market demands. This may lead to bloated warehouse shelves, and eventually to inventory write-downs and lower profits. Yikes.
There are some not-so-cryptic ways to find out whether your company's inventory is getting out of control. For starters, you might simply compare inventory growth with sales growth. If sales (also called revenues) grew by 8% over a given period and inventories grew by 14%, you have cause for concern.
You might also calculate a company's inventory turnover. (Learn how to make sense of inventory turnover.) It's a measure that will give you a sense of how quickly a company's products are flying off the shelves. As an example, consider General Motors (NYSE:GM) and Ford (NYSE:F). GM's inventory turnover for fiscal 2004 is around 5, while Ford's tops 13. This suggests that in the course of the year, GM filled and sold out its warehouses five times, while Ford did so nearly three times as often. On this measure alone, Ford looks much more attractive. Of course, you'd want to look at many more measures. (We can teach you how -- try our "How to Crack the Code: Read Financial Statements Like A Pro" how-to guide.)
What's that? You don't have the time or interest to crunch lots of numbers? Need ideas for where to find promising candidates? Then grab a free trial of one or more of our investing newsletters -- they deliver stock (and mutual fund) picks along with analysis. A free trial will permit you to peek at long lists of recommendations.
Meanwhile, learn more about the Atkins phenomenon and related topics in these Fool articles:
- Can Obesity Fatten Your Wallet?
- Lessons From the Calming Diet Trends
- 5 Stocks From High- Carb Heaven
Longtime Fool contributor Selena Maranjian does not own shares of any companies mentioned in this article.
