Agriculture stocks often find themselves ignored by most stock market investors. They lack the sex appeal of tech or the boom cycles of energy. However, none of us can live without food or the clothing that this sector brings. Also, because farmland serves as a vast American resource, U.S. agriculture goes a long way toward feeding much of the world. In fact, the ag sector finds itself caught in the middle of America’s recent trade war with China.
Despite its importance, the sector has remained out of favor for decades. Due to its unpopularity, another trend has emerged in this sector that could benefit investors but hurt the population at large. In the United States, the average farmer has reached the age of 58.3 years. This trend also appears in other developed countries.
This becomes dangerous as once these farmers retire or pass away, critical food shortages could arise. As such, I will use my soapbox to appeal to the young and the career changers. For those who are looking for a potentially lucrative career in a rural setting, please consider enrolling in a school such as Iowa State or Texas A&M to study agriculture.
Regarding investors, my appeal takes on a similar tone. While we all hope this worst-case scenario does not occur, such shortages will likely send all ag-related stocks higher. These five agriculture stocks to buy trade at lower valuations and offer the potential for growth as the farming sector stages a comeback.
Agriculture Stocks to Buy: Deere & Co. (DE)
The equipment produced by Deere (NYSE:DE) makes possible the scale of farming occurring today. Most Americans know Deere tractors and other farm equipment by the shade of green it uses to paint its equipment. However, as the shortage of farmers becomes more acute, equipment will play a more critical role in helping to maintain production levels. This makes DE stock one of the essential agriculture stocks to buy.
After seeing profits fall over the last few years, Deere finds itself growing again. For the year, analysts forecast 43% net income growth this year and 22% the next. Wall Street expects an average growth rate of 27.38% per year over the next five years.
Prospective buyers will also like that the price-to-earnings (P/E) ratio has yet to catch up to this growth. Given predicted earnings of $9.54 per share for 2018, DE stock trades at just over 15 times forward earnings. They will also like that they can buy this stock for over 16% less than the high reached in January.
The stock saw similar pullbacks in 2011 and 2015. Each time, DE stock regained the loss and moved higher. Given the profit growth predicted, the same thing will likely happen again.
Moreover, they will earn a 1.9% dividend yield while they wait for the recovery.
Despite this average yield, investors should know that DE has seen a long history of annual dividend increases in most years. Last quarter, the stock saw its first dividend increase since 2015. Assuming profits continue on the current path, one can expect the dividend increases will continue as well. Given the low P/E, the growth rate and the prospect for dividend increases, DE stock should serve as a lucrative vehicle to profit from the farmer shortage.
Agriculture Stocks to Buy: Israel Chemicals (ICL)
Israel Chemicals (NYSE:ICL) finds itself well-positioned among agriculture stocks to buy. As the name implies, this company bases itself in Israel, although it sells its products worldwide. ICL produces performance, industrial, and fertilizer products. However, fertilizer drives the majority of its revenue and profits. This fertilizer increases both the supply and the quality of food available in over 180 countries. Despite the stock’s market cap of about $7.3 billion, ICL has become the sixth-largest producer of potash.
ICL stock trades at a forward P/E of around 14. Even with this multiple, analysts expect to see 23% profit growth this year. They also predict 14% growth next year.
That said, investors should keep an eye on this stock as the fertilizer industry can catch investors off-guard. In 2011, ICL stock traded as high as $18.45 per share. The stock fell steadily until it reached a low of $3.52 per share in 2016. Since then, the stock has moved upward and today trades close to $5.70 per share.
The dividend followed much the same pattern, falling from an annual rate of $3.48 per share in 2010 to as low as 11 cents per share in 2017. However, this year, shareholders will earn 17 cents per share in dividends. This takes the dividend yield to about 3%. As long as profits continue to grow, this dividend should likely follow.
The fertilizer business can see a high level of volatility as most of this decade has proven. Still, the stock appears to have broken its downtrend. With the low P/E and the high dividend, I think ICL stock will remain profitable as long as it can maintain profit growth in future years.
Agriculture Stocks to Buy: Industrias Bachoco (IBA)
Bachoco (NYSE:IBA) has become one of the leading poultry producers in North America. Based in Celaya, Mexico, it also operates in the United States by having purchased O.K. Foods, Inc. It produces chicken, eggs, feed, swine and turkey. It runs over 1,000 facilities in both Mexico and the U.S. Together these employ about 25,000 people.
The effects of the recent Mexico-U.S. free trade agreement have yet to become known. Still, from an investment perspective, its market dominance in Mexico and share of the U.S. market position the company well. For those hesitant to invest in a Mexican company, know that Bachoco received a AAA credit rating from Fitch Mexico, the highest score available on Fitch’s scale.
Analysts expect a drop in earnings this year. Hence the forward P/E stands at about 12.4, up from the current 10.8 multiple. However, Wall Street projects the company will increase earnings by 6.7% next year. This pattern of increases in the mid-to-high-single-digits should continue in the years to come.
While I like the earnings and the multiples on other agriculture stocks better, the connection to Mexico becomes vital for another reason. About 13.1% of Mexico’s workforce is employed in the ag sector. Fewer than 2% of U.S. workers work in the ag sector. This could help to provide food and workers should the U.S. shortage become unbearable. By extension, IBA stock would benefit as well.
Bachoco offers a low multiple, a high credit rating and understanding of the U.S. market. What it lakcs in profit growth, it makes up for in capacity. Given the growing importance of the sector and its connection to the U.S., investors should keep IBA stock on their list of agriculture stocks to buy.
Agriculture Stocks to Buy: Scotts Miracle-Gro (SMG)
Most Americans know Scotts Miracle-Gro (NYSE:SMG) best for fertilizer. As such, it has attracted little investor interest until recently. However, Scotts has improved its fortunes by capitalizing on a growing trend within the developed world — cannabis legalization. This loosening of marijuana restrictions helps to make it one of the more interesting agriculture stocks to buy.
Through a division called the Hawthorne Gardening Company, Scotts now provides products to help artisanal cannabis farmers grow weed. As a result, most investor interest in SMG stocks now revolves around marijuana.
In fact, during the last quarter, a revenue miss within Hawthorne sent SMG stock tumbling. However, as I inferred in a recent article, delays brought about by California regulatory authorities likely brought about the decline. As more states legalize, California will begin to represent a lower percentage of sales.
Furthermore, SMG stock remains one of the few agriculture stocks to buy that involves itself with cannabis and still trades at a reasonable valuation. SMG stock sells at a forward P/E of about 19.6. This compares well to marijuana company leaders Canopy Growth (NYSE:CGC) and Aurora Cannabis (OTCMKTS:ACBFF) who trade at triple-digit PE ratios when they support PE ratios at all.
Other metrics bode well for the equity. Holders of SMG stock will receive a dividend yield of about 3%. For next year, analysts also forecast profit growth of 11.9%. Growth may slow in future years. However, given the premium multiples on today’s marijuana stocks, the P/E below 20 serves as only one of the many compelling reasons to buy SMG stock.
Agriculture Stocks to Buy: Tyson Foods (TSN)
Springdale, Arkansas-based Tyson Foods (NYSE:TSN) has grown into the world’s second-largest company involved in the production of chicken, pork and beef. It also owns several familiar food brands, including Jimmy Dean, Hillshire Farm, Ball Park and Sara Lee. Consumers can find Tyson products in most major grocery stores. They also supply restaurant chains such as Yum! Brands (NYSE:YUM) restaurants such as KFC and Taco Bell, as well as McDonald’s (NYSE:MCD) and Wendy’s (NASDAQ:WEN). Store chains such as Walmart (NYSE:WMT) and Kroger (NYSE:KR) also sell large amounts of Tyson products.
Tyson has also made efforts to sell abroad. Purchasing Marfrig Global Foods and Keystone Foods gives Tyson international exposure. Tariff worries have taken TSN stock down over the near term. However, the recent trade deal with Mexico gives investors hope that tariffs will become only a temporary concern.
Hence, the fall in TSN stock and the low multiple should attract investors. TSN trades at a forward P/E of about 10.7. Additionally, analysts expect to see 10.5% profit growth from last year’s levels. Though profits could slow next year, Wall Street still expects average profit growth of 7.5% per year over the next five years.
While buyers wait for the stock price to recover, they can earn a dividend yield of around 1.9%. While not a high yield, Tyson has increased this dividend in most years. Hence, it could become a good reason to stay in the stock even if a recovery comes slowly. Given the attractive financials, as well as Tyson’s involvement in the production process, TSN stock could end up becoming one of the better agriculture stocks to buy.
As of this writing, Will Healy did not hold a position in any of the aforementioned stocks. You can follow Will on Twitter at @HealyWriting.