If demographics are destiny, then it’s hard to find a better long-term investment case than agriculture stocks.
After all, people need to eat — and there are more of us all the time. The current global population of 7 billion people is projected to hit 9 billion by 2040.
That’s a jump of almost 30% over essentially one generation — and explains why legendary fund manager Jeremy Grantham is so long-term bullish on finite resources like land, oil and forestry.
In the shorter-term, however, agriculture stocks get whipped around by a variety of factors, from energy prices to acres planted in, say, Brazil. And make no mistake: In 2013, agricultural stocks are getting whipped. Corn prices are declining, fertilizer prices have crashed and headline risks abound. It just hasn’t been a fun year to be in the sector.
But that doesn’t mean there are no opportunities. There are — to both buy and sell.
Here’s a quick look at three top stocks to help decide whether you should buy the bargain, bide your time or just bail out:
Whether it’s phosphates, sulfur or nitrogen, agriculture stocks have stunk up the market this year. Agrium (AGU), which sells all three through both wholesale and retail, has seen its stock fall 15% for the year-to-date, lagging the S&P 500 by 33 percentage points.
The problem is a corporate/diplomatic clash between Belarus and Russia over a cartel that controls 40% of global phosphate production. The cartel might – might — be falling apart, causing prices to plunge for all fertilizers.
That been brutal for everyone in the business, but AGU has more knocks against it: It’s not No. 1 or No. 2 in its industry; it has missed Wall Street estimates in two of the past four quarters; there’s little or no sales or profit growth on the horizon; and it has a long-term growth rate of only 5%.
Bottom Line: Yes, Agrium treats shareholders right with a decent 3.5% dividend, but that’s not enough to make up for the far-below-average growth rate — and better opportunities elsewhere.
The world’s biggest seed company delivered a double-whammy Wednesday. Not only did Monsanto (MON) blow the Street’s fourth-quarter earnings estimate, but it cut its full-year outlook too. Declining seed sales and ballooning costs were to blame.
Naturally, shares sold off on the news, which only confirms what a lackluster year it has been. MON is up 9% on the year, lagging the broader market by 7 percentage points.
Still, there’s no reason to bail out on this ag stock just yet. Costs can always be brought under control (corporate America is great at that), and the latest results were the exception to the rule. Prior to today, MON beat the Street’s profit projection for three straight quarters.
Bottom Line: Monsanto is the industry leader where secular growth is a slam dunk. But with a long-term growth rate of 14% and a forward price-to-earnings ratio of 20, shares are fairly valued at best. Not too pricey to dump, but not cheap enough to buy, either.
Potash Corp. of Saskatchewan: Buy
Like all fertilizer companies, Potash (POT) has been absolutely hammered by falling prices tied to the supposed demise of the Eastern European cartel.
With the stock down 22% for 2013, the selloff is more than overdone, making this industry leader look like a bargain buy. For one thing, prices are close to bottoming out. That damage is done. Additionally, now that President Putin is involved, a resolution to the potash fight in Eastern Europe could be in sight.
Furthermore, Potash’s business has high barriers to entry. Phosphate has to be dug out of rock, giving this business mining-industry-type upfront costs. Long-term, that makes POT’s No. 1 position look unassailable.
Bottom Line: Shares have discounted all the bad news, making them look like a bargain. On a forward earnings basis, the stock fetches just 13 times earnings, or about a 10% discount to its own five-year average. Once the Russia situation is worked out, prices will bounce back, and so too will Potash stock.
As of this writing, Dan Burrows did not hold a position in any of the aforementioned securities.