Hedge Funds Are Bullish About These Agriculture Stocks

Robert Baillieul

NEW YORK ( Insider Monkey) -- Severe drought and record heat is wreaking havoc on the Midwest's food harvest. Lower farm yields and dwindling inventories have resulted in a 50% surge in corn prices over the past month with little relief in sight.

But record food prices have created a boom for agricultural chemical companies. The sector is up 13% in the last month with traders are betting that higher food prices will boost demand for fertilizers.

The rally in the agricultural space has attracted the attention of institutional investors. Here are the top four fertilizer plays hedge funds are betting on:

Mosaic ( MOS): On July 17, Mosaic reported fourth-quarter earnings. The company beat the Street's expectations by reporting earnings per share of $1.19. Earnings fell 18% year over year due to weaker demand for potash and other agricultural products, but management provided an optimistic industry outlook, stating that farmers will "have their foot on the accelerator" with regards to producing more grain due to record high agricultural prices.

With a forward price-to-earnings ratio of 10.6, Mosaic is valued at a premium compared to its peers. With an estimated five-year EPS growth rate of 8%, the stock trades at a rich 1.3 P/E-to-growth ratio, or PEG. However, Mosaic has the highest dividend yield in the industry at 1.75%.

In addition, several hedge funds have been building positions in Mosaic. Michael Kaufman at MAK Capital One doubled the size of his position during the first quarter, bringing his total stake in the company to $77 million.

Richard Chilton at Chilton Investment Company increased his position by 30%, bringing his stake in the fertilizer company to $102 million. Billionaires Ken Fisher and Steven Cohen are also among Mosaic shareholders. (See Steve Cohen's top stock picks at Insider Monkey.)

CF Industries Holdings ( CF): CF Industries has been one the top performers in the fertilizer space. The stock is up 200% over the past five years and has returned 14% in the last month. The company reported record profits during the first quarter, posting an impressive 54% year-over-year increase in earnings to $5.54 a share.

CF Industries is the cheapest stock in the fertilizer space, trading at a forward P/E of 8.3. The stock also has the lowest dividend yield in the industry at 0.81%.

Several hedge funds initiated positions in CF during the first quarter including Anthony Bozza at Lakewood Capital Management and Michael Messner at Seminole Capital. Billionaire Jim Simons' Renaissance Technologies boosted its stake in CF by 62%. Simons' hedge fund has the second largest position in CF among the 400 hedge funds we are tracking (See Renaissance's biggest bets at Insider Monkey).

Potash Corp of Saskatchewan ( POT): Potash Corp., which was previously featured on Insider Monkey, posted sluggish second-quarter earnings results on April 26. The company reported EPS of 56 cents, missing the consensus estimates by 8 cents. The company's revenue was down 20.8% year over year.

Potash Corp. is the most expensive stock in the fertilizer space, trading at a forward P/E of 12.3. However, analysts believe this premium multiple is justified due to the company's exceptional growth profile. Potash Corp. is projected to grow EPS by 14% next year, giving the stock a 1.35 PEG ratio.

Several hedge funds have initiated positions in Potash Corp. during the first quarter including Paul Tanico at Castlerock Asset Management and Michael Karsch at Karsch Capital Management. The company is scheduled to release second-quarter earnings after the bell on Thursday, July 26. Analysts expect a strong report with improved guidance on higher commodity and potash prices.

Billionaires Richard Chilton, Steve Cohen and James Dinan are among the top five holders of Potash.

Agrium ( AGU): Agrium shares hit a new 52-week high following a strong earnings report on July 18. Management raised its EPS guidance by 15%, citing robust demand for agricultural products. The impressive results sparked a series of upgrades and target price hikes by equity analysts.

Agrium is one of the cheaper names in the industry. The stock trades with a forward P/E of 9.2.

Hedge funds were actively building positions in Agrium during the first quarter including Wayne Cooperman's Cobalt Capital Management and Michael Messner's Seminole Capital. Value investor Joel Greenblatt and billionaire Israel Englander are among the hedge fund managers who initiated brand new positions in this stock.

This article is commentary by an independent contributor, separate from TheStreet's regular news coverage.

This commentary comes from an independent investor or market observer as part of TheStreet guest contributor program. The views expressed are those of the author and do not necessarily represent the views of TheStreet or its management.

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