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The major sell-off following AgFeed's (OTC:FEED) last quarter results has created an opportunity to buy the stock, currently trading at 2.5xPE '08 (Bloomberg estimates).

Company overview:

AgFeed Industries, Inc. is a US public company listed on the NASDAQ Global Market under stock symbol “FEED”. It is the largest commercial hog producer and the largest premix feed company in China. Although you may argue about the cyclicality of its business, it is difficult to bet against the secular trend in the rising income and meat consumption in China. FEED operates in two business lines: premix animal feed and blended feed as well as hog production.

Market drivers:

The ratio between the Lean hogs futures and FEED share price has exploded in the last month, clearly demonstrating forced selling and capitulation. Lean hogs and pork bellies are now trading 10% off their lows while FEED is still underperforming. The company has a net cash position, 25% margins and a growing top line. Management recently slashed its guidance to 55-65c for the current year. Even with a bearish assumption of 50c, the stock is trading at 2.5x PE (1.8x EV/EBITDA) and at $1.4 is assuming no growth next year.

With a 1 to 2 years time horizon, I consider FEED as a call option with no theta. I am expecting the margins to improve next quarter given the falling prices in soybean, corn and wheat (used in the premix business) and the improvement in lean hogs futures prices. RSI is below 30 and the stock is trading below the lower Bollinger band. Agfeed should trade at least at 8xPE or about $4-5 per shares.

Disclosure: Author has a position in the stock.

Source: AgFeed: Major Selloff Creates an Opportunity to Buy