One of the investment themes that gets discussed fairly often in the news, on TV and among various pundits is the need for agricultural chemicals and products to increase crop yields and feed a growing planet.
Although emerging markets have slowed down, they are still growing faster than the developed world and creating a new middle class that wants higher-quality food and is consuming greater quantities of meat, fruit grain and dairy products. The story as told by the gurus is that this demand will drive these stock prices higher and investors should be adding these stocks to their portfolios as head into 2014.
It makes for a very compelling story but as with so many stories in the world of finance, adding some facts to the mix reveals a totally different picture. Agriculture stocks have been pretty weak all year. As the food and fertilizer story gained momentum a few years ago, agriculture stocks climbed for an extended period of time but have given back the gains in the last year or so and totally missed the great rally we saw in 2013.
The simple truth is that the fundamentals never developed the way investors had hoped, and in the midst of a global recession the money many thought would be expended in agricultural products was spent in other areas. These stocks have terrible fundamentals, leading the big money has dumped the stocks and they have experienced strong selling pressure all year — all of which is reflected in Portfolio Grader.
Fertilizer stocks have led the pack lower. The major players in the industry such as Potash (POT) and Mosaic (MOS) are simply not seeing the revenue surge they expected after the global economy emerged from recession. Nor does the business seem likely to get better any time soon. Both were downgraded to an “F” by Portfolio Grader last week and are “strong sells” as we head into 2014. Agruim (AGU) is the fertilizer and nutrients business as well, and that stock has been a “strong sell” for some time after being downgraded by Portfolio Grader back in July.
The outlook on the machinery and equipment side of the agriculture business is no better. Industry leader Deere (DE) had been rated “D” since earlier this summer, and there are no hints of an upgrade in the fundamental situation at the company. AGCO (AGCO) sells a wide range of agricultural equipment including tractors, sprayers, balers storage bins and feeders. The company is seeing tough business conditions and was downgraded to a “D” last month; AGCO stock remains a “sell” at the current price. Lindsay Corporation (LNN) makes irrigation equipment, and it seems that farmers and ranchers are sticking with their old supplies rather than spend any money on new equipment — business is not as robust as analysts had hoped. This stock is also ranked “D” and has been a “sell” since September.
The farm and food story is a great one and has all the making of a great investment theme. In fact, someday the story will likely play out exactly as the pundits tell the tale. However, when we hold the story up to the harsh light of Portfolio Grader we see that the fundamental are not developing yet and the big money is not the buying the story. You shouldn’t buy either until we see substantial fundamental improvement in the agriculture companies.
Louis Navellier is the editor of Blue Chip Growth.