Daily Gains Letter

Agriculture; the Next Black Gold?

By for Daily Gains Letter | Mar 20, 2013

200313_DL_clarkWhen the stock market experiences its next major pullback, it should be an attractive entry point to consider select large-caps that pay dividends. On the cusp of another earnings season, most large U.S. corporations are in excellent financial health.

There are a number of investment themes playing out in the current business cycle. When gold prices were lofty, stocks like Caterpillar Inc. (NYSE/CAT) and Joy Global Inc. (NYSE/JOY) were really doing well.

Stock markets in China, the world’s second-largest economy, have been drifting for several years, but emerging markets, like the Philippines and Malaysia, are growing like mad. And Japan’s stock market recently turned significantly higher. Many Japanese companies are expecting strong revenue gains this year on the back of a weaker yen.

The ebb and flow of the global business cycle is always changing; and with inflation creeping into the U.S. economy, the next big play will be in real assets, as the commodity price cycle makes its final migration into the agriculture sector.

Deere & Company (NYSE/DE) has the biggest market share of any large equipment manufacturer related to agriculture in the U.S. Currently, the stock is not expensively priced, with a price-to-earnings (P/E) ratio around 11.5. Deere’s stock chart is featured below:

dl_0320_image001Chart courtesy of www.StockCharts.com

On the stock market, Deere has proven to be cyclical and a very good long-term wealth creator for shareholders. Since 1963, the company has split its stock two-for-one on four occasions, the last one being in November 2007. Deere also split its stock three-for-one in November 2005, and the company has been increasing its annual dividends consistently for the last 10 years.

The company’s largest single shareholder is Cascade Investment, L.L.C., which is the investment holding company controlled by Bill Gates.

Deere’s stock market performance has been in a consolidation pattern since 2008, and I think it’s ready for a breakout this year.

Investing in agriculture-related assets is more difficult than in other sectors. Firstly, these businesses are related to commodities and smart resource investing is as much about good timing as anything else. Second, there isn’t a lot of variety in the marketplace for agriculture-specific plays. Many businesses related to agriculture are privately owned, and buying a ranch isn’t an option for most people.

The availability of investable assets in agriculture will improve as the sector trends upward in value. There are several options available in the stock market. Companies like Monsanto Company (NYSE/MON), Archer-Daniels-Midland Company (NYSE/ADM) and CF Industries Holdings, Inc. (NYSE/CF) are direct stock market plays.

I think capital markets on the whole are about to experience massive change. A new business cycle is almost here, and one of the investment themes worth playing is agriculture. Even if the sector takes a few more years to become popular, agriculture is a good way to play re-inflation, scarcity, global warming and changing demographics.

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