Scorching winds ravaged cocoa plantations in West Africa. The Ivory Coast and Ghana are home to the largest cocoa producers. They produce 60% of the world’s supply.
And that’s pushing cocoa prices higher.
This is a perfect setup for one of my favorite “Gemini trades.”
Gemini refers to the Greek myth of the twins, Castor and Pollux. The two brothers were inseparable.
In the stock market, Gemini trades are between two related, but opposing investments. When one goes up, the other goes down.
One example is between airline stocks and oil. Jets burn tons of fuel. Climbing oil prices squeeze airline margins tighter.
That means high oil prices hurt airline stocks. And falling oil prices give these stocks a nice tailwind.
One of my favorite Gemini trades is an agriculture tandem of cocoa prices and candymaker Rocky Mountain Chocolate Factory (NYSE: RMCF).
These two are a perfectly opposed pair, as you can see below:
The chart shows cocoa prices and RMCF share prices normalized to one another.
When the brown (cocoa) line is high, the black (RMCF) line is usually low.
Right now, we have rising cocoa price and falling RMCF shares.
That’s because the price of RMCF’s key ingredient, cocoa, is getting more expensive.
RMCF can only charge so much for chocolate before customers balk. So, expensive cocoa eats into its profit margin.
What you can’t see from the chart above is that cocoa prices are at their highest price since 2018. That pushed RMCF to its lowest price since November 2018.
I expect shares to keep falling for a little while longer. But once the cocoa shortage gets priced in, RMCF shares will find a bottom. And when they do, that’s the time to buy.
Stay tuned for an update from me when it is time to act on this Gemini trade.
Editor, Real Wealth Strategist