One of the more popular investing themes has been for several years: The demand for food around the world is going to grow, and the need for chemicals to fertilize and help grow food are going to cause demand to surge for many decades to come. Because of this, investors should own fertilizer and chemical companies that supply the products to meet this long-lasting demand.
As long as emerging markets were growing and lifting people out of poverty, it was a pretty good story. The companies had good earnings growth, so the stock prices soared. Now, however, growth is slowing and there is no way these stocks are worth their valuations.
Stocks to Sell: Monsanto (MON)
The largest company in the sector is Monsanto (MON), and the past few years have been good to the stock. After bottoming in 2010, the stock has more than doubled over the past four years as earnings and revenue saw solid increases. Now the company is seeing much slower growth, and even the always-optimistic Wall Street analysts see only mid-single-digit increases for the next several years.
Global discontent with genetically modified organisms could cause results to fall short of even the most pessimistic expectations for the company. However, the stock is still trading at 24 times earnings and 4.6 times book value. With Monsanto’s slowing growth and relatively high valuations, I see no valid reason to own the shares at this time.
Stocks to Sell: Mosaic (MOS)
Other than a brief run in late 2012, shares of fertilizer and animal nutrient company Mosaic (MOS) have done very little for the past five years. As emerging markets submerged, sales and earnings have fallen off a cliff, and no sustained improvement is in sight for the Mosaic.
Even with poor results and dim prospects, the stock isn’t exactly cheap at 20 times earnings and 1.75 times book value. Again with no growth, it seems unreasonable to pay a premium valuation for the company.
Stocks to Sell: CF Industries (CF)
Investors who were clever enough to buy shares of nitrogen and phosphate fertilizer products CF Industries (CF) back in 2009 have seen their initial stake increase nearly fivefold. The near-term outlook for the fertilizer business isn’t terrible … but at best, that will mean high single-digit earnings growth for the next several years.
Trading at 7.8 times earnings, it is in the cheapest of the agricultural chemical companies but the stock fetches 2.7 times book value. If we use the Graham number to consider both earnings and assets, the company is overvalued by more than 20% at the current price. Being the least overvalued company in the sector is not sufficient reason to buy shares of CF Industries right now.
The story sounds great, but the numbers do not support the case for buying these stocks right now. At some point, they might … but that will require much higher growth rates or much lower stock prices.
As of this writing, Tim Melvin did not hold a position in any of the aforementioned securities.