The agricultural industry has not been the best performer as of late, but many popular investors have been buying into the sector during the downturn, including billionaire investor George Soros and his former partner Jim Rogers, among others. With the drought sending corn, wheat and soybean to modern-era highs last year and early this year, many analysts expect these trends to continue into the first half of 2013. Below, we outline three agriculture stocks that have outperformed the rest and may be setting up for a big 2013 [for more agricultural news and analysis subscribe to our free newsletter].
1. Adecoagro: Riding Soros’s Coattails
Adecoagro SA (AGRO) is one of the largest owners of productive farmland in South America, with operations in Argentina, Brazil and Uruguay. As of November 2012, the company owned a total of 38 farms, several agro-industrial production facilities, four rice-processing facilities, one dairy operation, and 12 grain and rice conditioning and storage plants.
With a business model focused on low-cost production, geographic diversification and vertical integration, sell-side analysts expect the $1.15 billion company to see earnings growth of 38% annually through 2017. The stock currently trades with a multiple of around 15-times earnings, which makes it relatively cheap given these projected growth rates [see also Commodity Fund Profile: George Soros].
Billionaire investor George Soros has also been involved with the company since its initial public offering in early 2011. Since then, the company’s shares have fallen by about a quarter, but Mr. Soros remains confident, boosting his ownership stake to 21.3%, according to a recent 13D filing with the U.S. Securities and Exchange Commission.
Adecoagro has outperformed the PowerShares DB Agriculture Fund (DBA) by around 5% over the past three months.
2. Deere & Co: All Good Minus the Debt
Deere & Co. (DE) is a manufacturer of agricultural and turf equipment, as well as related service parts. With a market capitalization of over $34 billion and a 2% dividend yield, the company represents a potentially attractive play for conservative income investors looking for exposure to the agricultural industry with direct exposure to volatile commodities.
While the firm operates non-agricultural divisions, like its construction division, approximately 75% of its revenue come from the sale of tractors, loaders and other farm equipment. Moreover, nearly half of the company’s revenues (41%) came from foreign operations in 2011, which was up 37% from 2010 figures, suggesting very diverse revenues.
The company also has a long track record of delivering value to shareholders in the form of dividends and share buybacks, as well as a cheap price-earnings ratio of just 11.7-times its trailing 12-month figures. But investors should be aware that the firm does have a sizeable $32.5 billion in debt on its balance sheet, which could become a problem in the event of a slowdown.
Deere & Co. has outperformed DBA by around 8% over the past three months.
3. Mosaic Co.: Favorable Economics … For Now
Mosaic Company (MOS) is a producer and marketer of combined concentrated phosphate and potash crop nutrients for the global agriculture industry. With crop prices driving favorable farmer sentiment and buying, fertilizer demand and pricing could be set to rise into the first half of 2013 in places like North American and Brazil where acreage is increasing.
Despite these favorable trends, investors should tread cautiously moving into the second half of 2013, since the increased production that’s beginning now could send crop prices lower. Fertilizer companies, like Mosaic Company, and crop prices tend to have a high correlation, which means that there could be some weakness in the stock ahead [see also The Ten Commandments of Commodity Investing].
Investors looking to build exposure in the stock may want to wait for crop prices to bottom or slowly accumulate over time. One strategy worth considering would be averaging into the stock and writing covered call options over time to slowly reduce the breakeven point. Alternatively, protective puts can offer a degree of protection for those in long positions.
Mosaic Company has outperformed DBA by around 12% over the past three months.
The agricultural industry remains in an interesting spot moving into 2013. Crop prices have come down from their highs, but remain well above their normalized price ranges. The result has been a boon for several equities in the space, but many economists believe that the current prices may be unsustainable, particularly in the developing world.
The corn export market was cut in half due to higher pricing, but domestic feed needs picked up a lot of the excess supply at prices that remained higher. Recent price drops in many crops could help further boost and ultimately stabilize demand over the coming months, while weather will likely remain the top driver of global crop prices through 2013.
When it comes to investor sentiment, however, stock options may be perhaps the best measure. Currently, the PowerShares DB Agriculture ETFs at-the-money 27 JAN 14 call options suggest a $30.09 price target, while the 27 JAN 15 call options suggest a $32.23 price target, although it should be noted that both options are thinly traded.
Disclosure: No positions at time of writing.