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Agriculture Stocks Heat Up

Agrium

Monsanto

Deere

Syngenta

The Ag industry is gaining favor and the stocks of companies in that industry are beginning to perform well in the face of European troubles.

The Ag industry has some catalysts that drive prices that are not materially impacted by the banks in Spain and their mortgages on the plain. The hot US Midwest Summer and near drought conditions in much of the farm belt, as well as ongoing drought in China’s farmlands, plus a growing emerging market middle class that is demanding a better diet that is leading to smaller and smaller grain reserves has investors interested in these companies.

On June 6th, we added shares of Potash to our “Best Ideas” client portfolios. Since then, you can see what the stock has done:

Potasch Corp

You can see we were a few days early in this particular investment as it trailed down for a couple days, but we are up 11.81% on it so far and are quite pleased that our initial analysis has played out as anticipated.

Our reason for adding Potasch Corp to client accounts as a 2% position in the Best Ideas equity exposure was based upon:

> our discounted cash flow analysis gives a value for the company of $92.37, or 114% potential price appreciation (this is not a 12 month target, but more of a valuation based upon the companies operations and their ability to generate free cash flow)

> analyst consensus target price (usually a 12-month target) of $53.84, or 25% potential price appreciation

> 5-year average Earnings Per Share Growth of 39.95%

> Trailing twelve month EPS Growth of 40.94%

> 47% Gross Margins

> 36.55% Return on Equity

> 26.7% Return on Invested Capital

> PEG Ratio of 0.92% (less than 2 is good, less than 1 is optimal)

> P/E Ratio of 13 compared to 17 for its industry

> Debt to Equity Ratio in line with its industry competitors

The tough thing for investors to grasp is that stock price is not exactly correlated with performance numbers like those above. Stock price is influenced significantly by investor sentiment which is impacted by things that have no specific correlation to farmers buying chemicals for their crops.

For me, as long as I see a strong discounted cash flow value for a company, profitability, growth and financial strength ratios like those above – plus added catalysts that can transcend the news of the day – I am quite happy to invest in a company like Potasch.


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Mark