Can you invest to benefit from the "dining boom"?

Blindly investing in companies like Freedom Foods Group Ltd (ASX:FNP) to profit from the "Asian food boom" will send you to the poorhouse.

| More on:
a woman

You’re reading a free article with opinions that may differ from The Motley Fool’s Premium Investing Services. Become a Motley Fool member today to get instant access to our top analyst recommendations, in-depth research, investing resources, and more. Learn More

Following the mining boom, we now have the so-called "dining boom" – the result of surging demand for high-quality Australian produce from Asia's growing middle class.

The latest bandwagon appears to be leaving and everyone is scrambling to get onboard.

In the news today, a Chinese manufacturing company snapped up 700,000 acres of farmland in Northern Australia, whilst electrical retailer Harvey Norman Holdings Limited (ASX: HVN) announced an unexpected investment in the farming sector.

Is this a case of "diworsification" by leaving your circle of competence? I would have to say so and shareholders of Harvey Norman might be thinking the same thing.

Don't get me wrong, I am confident in the long-term outlook for Australian produce and agriculture, however, the crowd may be getting too far in front of itself and have unrealistic future expectations about some companies simply because they operate in the sector.

Having grown up on a farm, I know this industry is a cyclical long-term business venture subject to many risks including the temper of Mother Nature. Generally, it's a low margin business with minimal competitive advantages – not what we look for in a market-beating investment.

Freedom Foods Group Ltd (ASX: FNP) is a prime example. Last month the share price hit a high around $3.50 and was trading on a price to earnings multiple around 40. Freedom then announced its full year results two days ago:- a modest 4% increase in revenue, whilst profit before tax plunged 70%.

As many management teams like to do, "underlying operating EBITDA" was highlighted and was roughly in line with the previous year once you exclude numerous "one-off costs" such as marketing costs (which I personally would consider part of normal operating expenses). The share price is now trading around $3 which still appears overpriced to me.

The produce and agriculture sector has a lot of potential in the future, but you must research and understand the company, industry and associated risks before jumping in.

Blindly investing in a company because it happens to operate in a growing (but extremely risky) industry is the quickest way to the poorhouse.

Motley Fool contributor Mitch Sonogan has no position in any stocks mentioned. Unless otherwise noted, the author does not have a position in any stocks mentioned in the comments below. The Motley Fool Australia has no position in any of the stocks mentioned. 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. This article contains general investment advice only (under AFSL 400691). Authorised by Bruce Jackson.

More on ⏸️ Investing

Close up of baby looking puzzled
Retail Shares

What has happened to the Baby Bunting (ASX:BBN) share price this year?

It's been a volatile year so far for the Aussie nursery retailer. We take a closer look

Read more »

woman holds sign saying 'we need change' at climate change protest
ETFs

3 ASX ETFs that invest in companies fighting climate change

If you want to shift some of your investments into more ethical companies, exchange-traded funds can offer a good option

Read more »

a jewellery store attendant stands at a cabinet displaying opulent necklaces and earrings featuring diamonds and precious stones.
⏸️ Investing

The Michael Hill (ASX: MHJ) share price poised for growth

Investors will be keeping an eye on the Michael Hill International Limited (ASX: MHJ) share price today. The keen interest…

Read more »

ASX shares buy unstoppable asx share price represented by man in superman cape pointing skyward
⏸️ Investing

The Atomos (ASX:AMS) share price is up 15% in a week

The Atomos (ASX: AMS) share price has surged 15% this week. Let's look at what's ahead as the company build…

Read more »

Two people in suits arm wrestle on a black and white chess board.
Retail Shares

How does the Temple & Webster (ASX:TPW) share price stack up against Nick Scali (ASX:NCK)?

How does the Temple & Webster (ASX: TPW) share price stack up against rival furniture retailer Nick Scali Limited (ASX:…

Read more »

A medical researcher works on a bichip, indicating share price movement in ASX tech companies
Healthcare Shares

The Aroa (ASX:ARX) share price has surged 60% since its IPO

The Aroa (ASX:ARX) share price has surged 60% since the Polynovo (ASX: PNV) competitor listed on the ASX in July.…

Read more »

asx investor daydreaming about US shares
⏸️ How to Invest

How to buy US shares from Australia right now

If you have been wondering how to buy US shares from Australia to gain exposure from the highly topical market,…

Read more »

⏸️ Investing

Why Fox (NASDAQ:FOX) might hurt News Corp (ASX:NWS) shareholders

News Corporation (ASX: NWS) might be facing some existential threats from its American cousins over the riots on 6 January

Read more »