Industry Analysis- LT Bull Market - Food

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In any market, but especially an uncertain market such as this one, it pays to look for long term bull markets. The more I examine markets the more I become convinced that this is really a clear way to win in stocks. Long term bull trends consist of stocks that are in an area that is just getting warmed up and have a long way to go before it reaches the plateau of its business cycle. Such long term bull markets include areas such as conversion to electronic payment (MA and V), alternative energy, infrastructure in developing countries, dry bulk shipping, gambling in China and Asia in general, developments in medicine and science (including pharmaceutical plays), mining in Latin America, wireless and technological communications around the globe, food and fertilizer plays, and many others.

This is second in the series of Industry Analysis posts (the first was on the future of alternative energy... see top posts). This post views the most pressing bull market in the world: food and agriculture expansion. Since this is such a broad field the post sets a primer for research into food commodities and related plays. More posts that hit facets not able to be covered here will likely be posted to round out the picture later on.
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There is a long term bull market in food commodities afoot. Demand is growing and supply is having a hard time keeping up. That's the kind of play investors love. Here I examine some ways to play this trend. Originally I was going to cover everything in the outline but the potash fertilizer stocks alone took so much space that I decided I would just do these on this post plus a brief mention of ways to play ETFs and ETNs in food commodities and leave the rest for another time.

Outline- food commodity plays
I. Food and Fertilizer stocks
A. Fertilizers
i. Potash
a. POT
b. MOS
c. AGU
d. Some speculative plays- brief mention.
ii. Non Potash Fertilizers/ Food Related Companies-This will be for another post

B. Commodity ETFs and ETNs

C. Meat Stocks- also mostly for another post- brief mention here
a. Feed
b. Hogs
c. many others

I. Fertilizer Stocks
These stocks in my opinion present one of the absolute best way to play the long term bull market in food commodities. On pullbacks in the market and/or sector everyone should consider buying these stocks. There are no guaranteed buys in the stock market... and then there are potash fertilizer stocks. They will have corrections but we are still in the early phases of the bull market in food commodities and production and the corrections will almost certainly be flooded with OPPORTUNITY seekers. I hate buying stocks that everyone is bullish on but in this case it may really be justified. Let's look at the big 3 players to determine, based on quality and price, which ones may offer the best opportunities.

POT
The premium brand. These guys have by far and away the largest supply of Potash in the world. They dominate the field. They are the king of kings. The only reason to even consider the other fertilizer companies is that POT often gets the highest valuation and does not have the "undiscovered" value that some great small companies often do. Still... it is cheap fundamentally. Perhaps a little overplayed in the short run, but not strikingly. If you haven't listened to their last conference call do yourself a favor. It's worth every second of your time.


Fundamentals: (yahoo finance)
Closing Price 5/16: 207.00
Fiscal Year (FY) P/E: 20.25
FY earnings: 10.22
Fwd P/E: 12.781 (too high)
Fwd Earnings 16 (too low; I've seen this as high as 20 elsewhere and it is going to go up)
Earnings Growth (annual) last 5 yrs: 96%
Earnings Gwth Est. next 5 yrs: 10% (I'm slapping the Bullsht label here... who is posting this?)
PEG: 2 (ditto).

This company could grow 30-50% a year for the next 5 years or even more. Let's look conservatively at 25% growth for the next 5 years. That would put the PEG (assuming this years' estimate on yahoo is accurate) at 20.25/25 = .82. It could be much lower.
Looks like a steal! The only reason not to buy is that this stock has run up so much in the last few years and particularly recently (it was trading in the 120s at one point earlier this year!) that it could correct short term . There already was a pullback recently to 180 (actually as low as 175) at which the shares were snapped up like nobody's biz. Unless this market goes back into full bear mode (which will happen it's just a matter of when) all significant pullbacks are buying opportunities in my opinion. There is an opportunity cost here of not snapping up pullbacks. I made the mistake of selling at 187 after buying at 183 because I saw sector rotation coming. The rotation did occur, and lasted all of 1 second. With a stock this strong, as long as the overall market isn't in panic mode... I certainly will not let it happen again...

Technicals: See the Chart above... however some points:
The stock is way above 50, 100, 200 day averages. It's in the middle of it's Bollinger currently, RSI is above 50, not oversold, not overbought, and climbing. The recent significant pullback support is around 180, all time high (may be resistance) is 216. Would be challenging to find a prettier long term chart than this one...
MOS
The second place to turn for potash stocks in my opinion is MOS. This is also a very good company. I listened to its CC as well. Very impressive though it wasn't unreal like the POT CC. Note that POT, MOS, and AGU sell not only potash but also nitrogen, phosphate, and other related products. However the potash separates them from the rest since potash is the equivalent of the "limiting reagant" as they call it in chemistry... the compound that has the largest demand because it needs to ramp up to make the fertilizer mixes most effective (listen to POT CC). Additionally it must be mined and is in tight supply. MOS apparently has some operations in Brazil (read profile). If anyone owns MOS and wants to comment on anything that makes it stand out compared to POT feel free. Let's look at the fundamentals and technicals...

Fundies:


Fundamentals: (yahoo finance)
Closing Price 5/16: 129.66
Fiscal Year (FY) P/E: 30.92 *note FY ends in May vs. POT in Dec
FY earnings: 4.07
Fwd P/E: 11.5 (too high)
Fwd Earnings 11.26
Earnings Growth (annual) last 5 yrs: 87%
Earnings Gwth Est. next 5 yrs: 9% (I'm slapping the Bullsht label here... who is posting this?)
PEG: 3.44 (ditto).

Again a 25% 5 year growth rate is quite reasonable here. That would put the PEG at 30.92/25 = 1.24. This is just a general figure but it is certainly reasonable. I have no idea if MOS will grow faster or slower than POT... they both do well... but assuming they both grow equally this makes POT slightly more attractive based on this metric. I would consider buying both to hedge against an unpredicted event occurring at either. If anyone owns MOS I would love to hear why they like it vs. POT. It would help everyone involved.

Technicals and chart:
This stock has tripled in the last year. A comparative chart of POT and MOS on yahoo finance shows that MOS had outperformed POT on a 6 month, 1 year, and 2 year time frame. With a market cap of 57 B vs. 64B for POT Mosaic is now close to the same size as Potash on a market cap basis. Whether the performance of MOS has been due to it's being a smaller company and needing to catch up or some other fundamental reason I do not know. The even larger short term gains may lead to greater corrections than POT. This is just a thought... not a fact or a theory. These companies are both such great picks that I would need to investigate more to know which one is the better stock pick of the two. My inclination at these prices would be to buy both with a leaning towards POT in terms of weighting. This opinion may change as I learn more... but its tough to go wrong with either here unless the market collapses.

Here are some key technical areas:
MOS is above its 50, 100, and 200 day SMA. It has bounced off of the 50 and 100 in the last few months. The current 50 SMA is 117 and the 100 SMa is 108. The all time high is 143. The RSI is 57 and approx flat. This stock has been more volatile than POT, judging by the width of the Bollinger Bands. Of note, the BB width is around 20 now... in the past months when it has condensed to this level the stock was consolidating and had rallies. A longer term chart for this company is below.


AGU
At a market cap around 14B this is the smallest company of the big 3. It has had some earnings misses in the past year but recently its earnings have exploded as well. Let's take a look at this company...

Fundamentals: (yahoo finance)
Closing Price 5/16: 89.64
Fiscal Year (FY) P/E: 12.7
FY earnings: 7.05
Fwd P/E: 10.7
Fwd Earnings 8.38
Earnings Growth (annual) last 5 yrs: 25%
Earnings Gwth Est. next 5 yrs: 12%
PEG: 1.06



Technicals:
Again the price is above the major SMAs. The RSI is 64, trending up a bit. Above 50, not oversold, not reversing pattern, recent support around 85 and 78, all time high is 95.5. This stock seems to have been particularly volatile in the last months, though has calmed very recently according to the BB readings. A comparison chart on yahoo shows that AGU has underperformed both POT and MOS over the past 6 months and year but has matched MOS recently (3 months). Does this mean it has more growth ahead of it because it is smaller? I'm not sure.

Another note of comparison: ROE and operating margins are good to look at when comparing the companies. POT is amazing in this respect, with an operating margin of 36%, a profit margin of 27%, and an ROE of 28.5%. That's what I call a healthy company! MOS is 25% OM, 18% PM and 30% ROE, while AGU has relatively poorer numbers at 16, 12, and 29. Still with an ROE near 30 AGU is just fine also. Overall I personally am looking to get into POT and MOS, depending on price and pullback, and I seek to learn more about exactly what differentiates these two. Apparently on the CC for MOS it was said that MOS has more of a phosphate business than POT. I'm not sure what the significance is. I am still looking to learn more and more about the big 3 and welcome any thoughts regarding some of the key differences between especially MOS and POT. At this time AGU would be my third choice of the three.

To extend the overall topic a bit, the following Article shines some light on some speculative small potash explorer companies in Canada. This is a good read but all of the stocks listed are traded on Canadian exchanges... if your trading account allows you to trade this perhaps one of these will be the next buy-out target... I'll probably stick to the big 3 for now.

II. A mention of ETFs and ETNs in this space.
First of all ETFs, as you may know, track a basket of stocks. ETNs, on the other hand, track futures contracts. The ETNs are nice in this way because many retail investors do not want to actually purchase futures contracts. They are not nearly as liquid as stocks and if someone is not smart theoretically somebody could end up with a huge delivery of cotton or coffee or whatever at the end of the month...! THAT WOULD SUCK! Also buying and selling ETNs do not require a special account. It is a good idea to read about ETNs before buying though because you want to know exactly how long out the futures contracts track are, etc... the details are always of import.

Anyway... here are some interesting plays to do further DD on.
Of these I particularly like the grain and food ETNs. They have gone through the roof and have pulled back recently. I have not researched this enough yet to believe with confidence that food commodities such as grains will go up near term (this is partially a play on the weak dollar) but long term I think the demand is there. Jim Rogers, the legendary investor partnered with George Soros, seems to think the same thing. Also maybe the pullback is a buying opportunity. I need to do more DD and perhaps so should you.

The ishares ETNs are interesting. JJA and JJG are interesting plays. Also I like COW. I've read that farmers are slaughtering their (poor) animals right now because they can't afford to feed them with the high prices of feed. That creates a glut on the market and drops prices now but may significantly reduce supply and hence increase the price of meat in let's say a year from now or less. Additionally, the demand for meat will likely continue to go up as the global middle class incrases. COW is an ETN that takes may do well here.
DBA is also interesting. Not on the list but also worth checking out is MOO. With many of the ETFs I would prefer just to buy the underlying stocks of the best companies but if you are looking to spread risk in a bullish sector it is worth taking a look. There are many many more such ETNs and ETFs available. The link above provides a good starting point for further research.
Just added: this is a very very insightful article I found regarding this issue.

III. Meat stocks China and around the world
I believe that it is already happening and will accelerate in the years to come: the demand not only for the grains that feed animals but for the meat products will accelerate with a growing middle class in the world. For now FEED and HOGS and COW are good to check out. FEED and HOGS are definitely a bit speculatve but I have been watching them for awhile and on pullbacks they can be very good plays. There is probably a whole universe of other stocks around the world that are good plays that I have not had the time to look at yet. If you want it would probably help everyone who reads this, including me, to share ideas for further research in the comments section. Up to you of course.

A closing note:throughout different markets the really successful investors like Soros, Buffett, Lynch, etc. have done very well by focusing on areas of the market that are solid through and through based on long term fundamentals. Even if the bull market is going short (i.e. the US dollar as of last year... the English pound in the early 1990s (if interested check out what Blck Wednesday was all about).) The point is that I am always looking for the lowest risk, most assured, most tried and true ways to win in the market. To do this requires extensive research and the willingness to think outside the box. Even if this means seizing on the real opportunities that are staring everybody in the face but that many still neglect to jump on.

Best,
Jon

*Note- due to a busy schedule in my non stock market work most of my deeper posts will likely be prepared on weekends at least for the foreseeable future. Also if I learn more relevant stuff over time I will add it to this post... probably in a different color to show the new info... and I know! I know! there are typos in here and I will try to clean it up a bit over time but pl bear with me on this... there is a time cost to checking every detail and rather than not posting and waiting until everything is just right I prefer to put the ideas out there and clean up over time...

This blog is for informational purposes only. It does not give investment advice.