Beyond the ethanol and agriculture (or "ag") buzz, there are several things to be learned about investing in food and food-related companies. You need to understand the food development process -- from the farm to our mouths -- and how to identify each step along that food itinerary to recognize the investment opportunities (and risks). I refer to this path from farm-to- portfolio as the food investment chain. In this installment of the Finance Professor, I will look at this chain and help sort out the wheat from the chafe for your portfolios.
Down on the Farm With Machinery Manufacturers
We have to start with Mother Earth. Farmers need to get their farmland prepared to plant crops. Later on, once the crops are mature, the farmers will need to harvest those crops. In order to do this, they need to have farm machinery.
Efficient and productive agricultural equipment is vital to increasing farmers' yield. They require tractors, combines, harvesters, tillers, seeder and sprayers to achieve their objectives. With its deep agricultural and industrial heritages, the United States is home to the largest manufacturers of such equipment, however some international competition has garnered significant market share.
Here is a list of the largest agricultural machinery manufacturers:
Be aware that in addition to manufacturing agricultural equipment, many of these listed companies manufacture heavy construction and mining equipment. Thus, if you want to invest in a more farming-focused company, then you should perform more in-depth research The best places to start are the companys' Web sites, annual reports and quarterly earnings reports.
is an example of a company that derives a greater percentage of its revenues and earnings from farming equipment than its manufacturing peers.
I recently analyzed Deere's 2008 first quarter earnings for
. My conclusion: the stock should still enjoy long term growth from its agricultural business (this becomes more apparent when we see the growing demand from the next set of sectors in the food investment chain). However, Deere's commercial business, which focuses on non-farm manufacturing, was showing some weakness due to the slowing economy (especially in the United States). My takeaway: I like Deere, albeit at lower price levels and would wait for a pullback to the low $80s before taking a position.
Looking for Seeds to Sow With Chemical Makers
Farmers need seeds. But not only do farmers need seeds to plant their crops, they need better,
seeds. These bioengineered seeds are more resistant to harsh temperatures and disease. As a result, the quality of farmers' crops is improved and the yield to farmers is greater. That's where biotechnology comes in.
However, we need to go beyond high-quality seeds. Farmers also require better agricultural chemicals, which we all know as stinky and smelly fertilizer. Additionally, herbicides and other chemicals help farmers with insect, pest and weed control. Finally, for those who raise cattle, livestock and poultry on their farms, chemicals help reduce animal infection and increase milk production.
The big daddy of seed and agricultural chemicals is
, one of last year's hottest stocks. (Please note: to lock in gains in this overheated market, I recently sold my positions in Monsanto.).
Here is a list of a few other chemical companies:
If you believe
analysts' estimates, then CF and Potash offer some compelling growth relative to their peers. With a lower
forward P/E than Potash, Monsanto or Mosaic, CF appears to be a better
value play. Recently, I began a small position in CF after taking gains in Monsanto, because I still want to maintain longer term exposure to this part of the food investment chain.
Another player in this sector:
, which I did not list earlier because the company is located in Switzerland and I was not able to get readily reliable data to present. However, I think that Syngenta is worthy of further analysis, thanks in part, to its $25 billion
market capitalization and its international exposure.
Betting on Biofuels
For the most part, farmers are only in the business of planting, growing and harvesting crops. Those crops still need to be transported, stored, processed and prepared. For those steps, we turn to another set of companies, which become the intermediaries (or "middlemen") between the farms and our kitchen tables.
However, there is another factor that has breathed some fresh life and growth into this intermediary segment of the food investment chain. This is our increasing demand to create biofuels -- probably the most discussed: ethanol. The concerted effort by the U.S. Government and industry to create renewable and cleaner energy sources has made this once boring segment of the food investment chain a rising star.
So who are these rising stars? Here is a list for your investment processing:
After a feverish run over the last two years, the rate of growth in these companies may have reached a peak. Why? Growth rates are typically higher in the early part of a sector-specific growth cycle. This does not mean that we will not experience growth from this group, but rather that we have to adjust our future expectations of growth relative to the recent past. Consider the flat panel TVs and displays in the early 2000s: sales are still growing but at a slower pace.
If I had to choose one of those stocks to own, it would be Bunge. My reason: I believe that 2008 earnings estimates may be too low, as they do not reflect the company's revenue growth estimates and economies of scale.
That said, in 2008, this entire group of companies may offer more risk than reward. Again, because of the huge stock price runs they have experienced in the recent past. Furthermore, biofuels are in such demand that I would expect many other business entrants into this arena, which could provide yet unknown opportunity in the future.
A subset of companies in this part of the food chain includes fresh produce and product wholesalers. Three companies come to mind, which are worth researching:
If you have any interest in these stocks, before you commit any
capital, take the time to research each company on a
technical level. As always, a good place to start your research: earnings conference calls. Note that Fresh Del Monte will release its earnings and conduct its quarterly conference call on Feb. 26. This gives you ample time to do some pre-call research as described in the "
Beginners Guide To Earnings Calls."
Managing the Growth and the Risk
The three categories of the food investment chain described so far represent the front end of the the chain, which happens to be the fastest growing segment of the chain. Fast growth often brings opportunities for outsized gains, but can also carry the possibility for tremendous risk, if the "wrong" stock within a sector is selected.
If you want exposure to these front end segments, a possible investment solution to this dilemma is an
ETF that incorporates these segments and many of the stocks which I mentioned earlier (see "
How to Outperform the Market and Manage Risk With ETFs
"). This ETF is the
Market Vectors Global Agribusiness ETF
. The current top 10 holdings in the "MOO" represent nearly 65% of its total assets.
There is more to discuss along the investment food chain, which I will cover in the next installment of the Finance Professor. For now, here's your food investment homework: research Fresh Del Monte and tune-in to the company's
At the time of publication, Rothbort was long CF, although positions can change at any time. Scott Rothbort has over 20 years of experience in the financial services industry. In 2002, Rothbort founded LakeView Asset Management, LLC, a registered investment advisor based in Millburn, N.J., which offers customized individually managed separate accounts, including proprietary long/short strategies to its high net worth clientele. Immediately prior to that, Rothbort worked at Merrill Lynch for 10 years, where he was instrumental in building the global equity derivative business and managed the global equity swap business from its inception. Rothbort previously held international assignments in Tokyo, Hong Kong and London while working for Morgan Stanley and County NatWest Securities. Rothbort holds an MBA in finance and international business from the Stern School of Business of New York University and a BS in economics and accounting from the Wharton School of Business of the University of Pennsylvania. He is a Professor of Finance and the Chief Market Strategist for the Stillman School of Business of Seton Hall University. For more information about Scott Rothbort and LakeView Asset Management, LLC, visit the company's Web site at www.lakeviewasset.com. Scott appreciates your feedback; click here to send him an email.