Time to Buy and Hold for Reflation: Four Promising Sectors

Every crisis or mere downturn in the economy produces the declaration that the buy and hold strategy is dead. But this is exactly the time that a buy and hold strategy should be resurrected. After a 53% drop in equity markets, it is much scarier to create new short positions than new long positions. We as investors just need to be wise in our sector selection. There will no doubt be inflation once again one day from all this government money flowing from the printing presses across the world. We have to find the sectors that have long-term stories that will continue well after our current great global recession ends and resume their growth phase. Once identified, we should be grabbing the players in these sectors with both fists. Here are four sectors that fit that profile.

Agriculture. The old cliche is simple enough. People need to eat. The trend of a growing population with less farm land maintains a growing demand with lessening supply. With the U.S. government still willing to subsidize our farmers, there is money to spend on minerals such as potash, phosphates, nitrates, and the bio-engineered seeds. The U.S. government is also still willing to subsidize the boondoggle known as ethanol. Taking corn for fuel only inflates food prices across the board as the demand for corn rises it takes land away to grow other foods thus reducing their supply. It also raises the cost to feed chickens, pigs, and cows which in turn raises the prices of meat, cheese, milk, and eggs.

The Chinese equation of this story will not go away either. What is the number one thing that the rising middle-class in China want to do with their new wealth? Diet change. Specifically beef. The ag companies have been pounded as well, mainly a result of forced mutual fund and hedge fund liquidations. Mosaic (MOS) trades at 4.88 P/E, and a 5.44 forward P/E; Potash (POT) trades at 6.91 P/E, and a 5.87 forward P/E; and Agrium (AGU) trades at 3.72 P/E, and a 4.4 forward P/E. Earnings for the sector haven't been horrible either. While down from previous years this selling has been way over done and overdone for a while. An added bonus of this sector seems to be impending M&A activity with Agrium offering to buy CF Industries (CF) and rumors that Cargill will buy the remaining 35% of Mosaic that they do not currently own.

Steel. The stimulus package is centered around infrastructure. The U.S. government is willing and will throw tons of money at construction companies and suppliers of materials to give people jobs along with the need to fix our crumbling bridges, buildings, and roads. Once again, Asia and China factor into this equation as they have not even begun to make a dent in their build-out plans. China needs to accommodate 1.2 billion people with modern places to live and work. Dubai has many major, ambitious projects on hold. Most have already broken ground there. I realize there are protectionism worries here with the U.S. and China, but at the end of the day the U.S. will not want to anger the country that is buying its Treasury Bills on command, and China will not want to sabotage the country that their future economic success is tied to. In essence, cooler heads will prevail. 2009 will be a rough year for the steel companies, but as more stimulus projects come online, 2010 looks to be a nice rebound year for the sector.

Coal. While I am all for renewable, non-pollutable energy, there needs to be a bridge until the day of a "solar-panel for every home" comes to fruition. Coal is a cheaper source of power than oil even at oil's current level. It is also abundant in the U.S., which gives us an opportunity to depend less upon the Middle East for our energy needs. The same problem that the U.S. has with oil, China has with coal. China is now a net importer of coal and cannot burn it fast enough. Besides energy coal is also a piggy-back on the steel play. Metallurgic coal is a primary ingredient in steel. If you play this sector you want to play the Appalachian miners as they have huge reserves of metallurgic and thermal coal. Appalachian coal is also deemed the best quality for both metallurgic and thermal coal as well.

Like the agriculture sector, coal has been mercilessly pummeled and is at cheap valuations. Peabody Energy (BTU) is trading at 5.81 P/E, and a 5.59 forward P/E; Massey Energy (MEE) trades at a 14.76 P/E, but a mere 3.46 forward P/E; Arch Coal (ACI) trades at 4.87 P/E, and a 4.00 forward P/E; Patriot Coal (PCX) while the most speculative of these companies could provide the largest potential growth with a big presence in Appalachia after its Magnum Coal acquisition. Again, the earnings in this sector haven't been a disaster and have exceeded expectations most quarters.

Oil. Everyone has their opinion as to what the fair price of oil should be. Whatever it is it is higher than the $40.07/barrel it closed at today. The long-term supply and demand trends dictate that. For those of you that point to shale oil and deep-water drilling as to where supply growth will come from those projects have break-even prices of about $60/barrel. They are not viable at today's prices for any company to bring online and in the case of shale oil could take up to ten years to construct a shale oil field in Utah and Wyoming. Even oil sands has lost a lot of its luster at today's prices. OPEC nations such as Saudi Arabia and Kuwait are feeling this pinch as they have aggressively expanded oil fields and initiated new projects during the bubble which made their break-even price about $50/barrel. The point is there are many with incentives to get oil prices higher again. And we should not think there will be at least one more super-spike before the U.S. has and develops its energy policy.

Disclosure: Author holds long positions in MOS, PCX, and X

Comments

[basehitz:]

Coal stocks were one of my primary interests until I heard this quote from Obama:

Obama said "his policies would likely bankrupt the coal industry and make energy rates skyrocket "

If you've seen the damage done to drug stocks and health insurers just on the threat of pending legislation, hard to imagine what he might do to the coal industry. I saw live footage of him talking about coal. He said he wouldn't ban it's use, but would tax it to bankrupt anyone who tried. I was shocked. We get half our electricity energy from coal. Not only would it damage the coal industry, utility rates would also go higher.

Trying to outguess the radical changes being proposed is a game I don't want to play.

Mar 03 06:38 AM

[InflationHedge:]

I agree with your inflation thesis. The goverment is going to have the printing presses running 24/7 to pay for the stimulus package. We are going to have to pay for our deficit at some point and the only way to accomplish this is to debase our currency.

Gold here I come.

Below is a link to a blog highlighting agriculture/farmland as a good inflation hedge, which I believe might be another good idea.

farmlandforecast.colvi...

Mar 03 11:38 AM

[Aj2009:]

1.I won't agree with the choice of "coal" stock. It is necessary, yet it won't grow unless you take the "cheap" valuation of coal company into consideration.
2. You seems to put too much emphasis on China, yes, they have a big population, which does not necessarily = large demand.
Those are the people who try to spend what they have now not by discounting the income from tomorrow.

But they are the only major country who can try to encourage spending now. ----No matter how Fed try to assure us everything is OK, there will be no demand from the other side.

I agree with the agriculture play, yet I am not quite sure it will work. food commodity is quite seasonal and even political. I guess Obama will never guess his good will in health and military reform will lead such desperation from the wall street.

Mar 03 12:02 PM

[fran:]

remember, in the end the drugs/medicines will be purchased, the coal will provide the electricty which will be purchased. the purchases made by the citizen who will take the hits via higher purchase cost and any growth in taxes. for the gov't has no money but ours. i don't know of any ready substitute for todays medicines/drugs or coal to fire 50% of our electricity. Obama can't legislate those changes in any near in timeframe. he can only make our lives cost more.


On Mar 03 06:38 AM basehitz wrote:

> Coal stocks were one of my primary interests until I heard this quote
> from Obama:
>
> Obama said "his policies would likely bankrupt the coal industry
> and make energy rates skyrocket "
>
> If you've seen the damage done to drug stocks and health insurers
> just on the threat of pending legislation, hard to imagine what he
> might do to the coal industry. I saw live footage of him talking
> about coal. He said he wouldn't ban it's use, but would tax it to
> bankrupt anyone who tried. I was shocked. We get half our electricity
> energy from coal. Not only would it damage the coal industry, utility
> rates would also go higher.
>
> Trying to outguess the radical changes being proposed is a game I
> don't want to play.

Mar 03 01:43 PM

[Mira Buitwr...:]

This is the biggest load of crap I have ever read. Learn about coal before you spit it out onto paper.

Mar 03 06:47 PM

[nova:]

I was watching Bloomberg today. Two things struck my attentions:

1. Overall market was modestly up in a morning until Obama gave one of his endless array of conferences. Immediately following his speech, the market went negative.

Obama sounded as a professional demagogue similar to an old Soviet era communist party official with a lot of slogans without any substance.

He promised a lot in a future, he belittled everybody who did not agree with him, however, he did not offer any comprehensive analysis of the present crisis or any specific ways to address them.

2. The Senate appearance of the FED Chairman Ben Bernanke.

Ben tried to be very vague. Each time when he was asked a specific question, Ben was trying to demagog his way out. When it did not work, he claimed that there were no answers at this time since the present situation was too complexed and unpredictable.

Bernanke did not offer any insight into the FED actions capable of reversing the present financial crisis. He clearly indicated that he had no clue of what was going on. He sounded more and more like a casino loser hoping that his next roulette bet would bring a success. Nevertheless, he was depressed understanding the futility of the FED and the Treasury random bets.

The Bottom Line
Both our President and the FED chairman were clueless of what is going on and what to do. Both were trying to stick to the yesterday unrealistic script.

Mar 03 10:07 PM

[beegdawg007:]

I agree with coal and steel. Coal is so misunderstood by the average American investor. It is impossible to mention "coal" without someone responding with "obama's administration will kill coal" or something to that effect. People, the growth for coal is coming from China and India. Between the two countries there are 550 power plants under construction and they are going on line at the rate of 2 a week. Obama may be able to curtail the construction of future U.S. coal powered electric plants, but he can do little about those that are already operating because most cities have but one source of power. China already uses nearly 3 times as much coal as the U.S. and that will grow to 4 times in the next decade. China and India realize that this hysteria over CO2 will pass. If CO2 was the cause of global warming, why have the oceans been rising for 18,000 years. CO2 is good because it stimulates the growth of both plant and animal life on earth. Most non math type people do not realize that the CO2 in the atmosphere now at 385ppm, is to having 4 yellow tennis balls in a building which contains 10,000 tennis balls in total. And, 3 of those four tennis balls were put there by mother nature. And there is no evidence that yellow tennis balls have any more negative impact on the atmosphere than do white tennis balls. I am not the only nut who thinks like this. As for the ocean rising, it is. And, during the past 180 centuries (18,000 years) the ocean has risen 395 feet which, at over 2 ft a centure, is faster than it has been rising since the start of the industrial revolution. Go to the link at the end and you will see that 31,000 American scientists (9,000 PHDs) have signed a petition requesting that our government not sign Kioto or anything remotely resembling it because there is ZERO scientific evidence available which would lead any real objective scientist to conclude that CO2 is now or will in the future have an adverse effect on our economy. Pah.... leese do not take my word for this.. just go to....

www.petitionproject.or.../

This is important to understand because it explains why both China and India will continue to pursue those 550 coal powered electric plants over the next five years.

Mar 03 11:48 PM

[canary:]

You are incorrect about corn ethanol. It has lowered the price of gasoline about 30 cents per gallon. It keeps our farmers prosperous who are the source of half of the US exports, which should be a major goal.
Jobs and exports are the key targets for saving our nation. Coal is a growing export, and CO2 is not a greenhouse gas. It is a colorless, odorless gas, inert (not corrosive) and is necessary to supply our trees, bushes, flowers, farm crops for photosynthesis. Natural production of CO2 exceeds man produced CO2. It has been at a sustainable level the last 50 centuries.

Mar 04 10:41 AM

[obama:]

Coal ETF's & companies are a smart buy for the coming inflation.....

Mar 05 03:55 PM

[obama:]

Coal is undervalued

Mar 05 03:57 PM

[beegdawg007:]

The impact of Co2 on global warming is an issue very relevant to the future of coal. China and India both understand that our view of Co2's potential impact on the environment is, at best, silly!

Many "real" scientists are now speaking out on this. Most are amazed that the junk science promoted by Al Gore has gone this far, when there is really ZERO evidence that our climate is behaving now, any differently than it has for the past 12,000 years.

www.petitionproject.or.../

People who understand nothing at all about CO2, are now radically opposed to burning fossil fuels which release CO2. Most non-analytical people (probably 4 out of 5 people) view CO2 as a toxic gas which, if left unchecked, will eventually kill all life on earth. Given that CO2 is necessary for life to exist, this is really some marketing job which has been done by the Gorite camp.

If you ever find yourself discussing the "horrors of global" emissions with a "radical believer" in the 'CO2 will kill the earth theory', here are two questions to ask.

1. How much Co2 is now in the atmosphere, compared to 150 years ago? Most will not know... the answer is 285 ppm vs. 385 ppm. To put that into a visual format, picture a 5 ft by 20 ft cylinder filled with 10,000 tennis balls, where each tennis ball represents some form of atmospheric gas, i.e. Nitrogen, Oxygen, Argon, Helium, Water Vapor etc.. , Going back 150 years ago, 3 of those balls would have represented Co2. Today, at 385 ppm, Co2 would be represented by 4 balls. So "at least" 3 out of 4 of those tennis balls were put in the atmosphere by mother nature. Many scientists also believe that a significant percentage of that 4th tennis ball is also natural. This they believe to be true because as the temperature of the ocean increases (the ocean contains 93% of all of the Co2 on earth) and as plant life flourishes (plants contain 2 times as much CO2 as the atmosphere), CO2 is released into the atmosphere. And the earth has definitely warmed during the past 150 years because we are exiting the latest phase of the little ice age. But, lets stay focused on the forest vs the leaves for now. All of this hysteria about fossil fuels and CO2 is in regard to the fact that man may have added the equivalent of 1 tennis ball out of 10,000 to the atmosphere in the past 150 years. This is extremely minimal, ant that is why CO2 is referred to as a trace gas in the atmosphere.
2. Next ask your opponent, "how much CO2 is good?" 99 out of 100 people will have no idea how to even answer that question! The answer is not a precise number, but we know that plants (both land and marine) become more abundant and grow larger and faster as the amount of CO2 is increased. Based on sampling the ratio of certain microscopic marine critters buried in layers of deep ocean sediment, scientists have been able to estimate that CO2 on the planet earth was 4 -5 times higher than now during the Triassic and Jurassic periods. This 100+ million year period of time is the period of time when life was "most abundant" on earth. During this period, based on fossil evident, we know that flora and fauna were most abundant.

To summarize my points, most people who are radically opposed to man's use of fossil fuels because of their fear of CO2 emissions, have no understanding at all of the role that CO2 plays on earth. Their fears of CO2 are but a boogie man that has been placed under their bed by politicians who clearly have an agenda that does not involve good science. There is ZERO real scientific data to lead any thinking scientist to believe that CO2 being added to our atmosphere at the current rate, will have any "negative" impact. We do however know that CO2 stimulates plant growth which has historically always been beneficial to earth's animals.

www.petitionproject.or...

31,000 American Scientists agree with what I have just posted...

www.petitionproject.or.../

Mar 06 12:02 PM

[svosavvy:]

I would only add a couple things. China seems quite interested in prb (powder river basin) coal, as they are bleeding indonesia dry of quality coal. A relatively major component of coal pricing is destination cost. Canadian pacific appears to have bought the rails to get it out, let's see if they can move it to vancouver port cheap. We are in a legendary credit crisis and nothing is moving right now, if you have a little foresight hopefully you would realize that it won't be like this forever. The shovels are being idled because no one is making steel and electricity usage is falling like a stone, there are less big hungry industrial machines running right now. Long ACI Big Thunder, I want to be long CP when the price comes in some more, if it levels off I may sell some CP puts. Long high taxes on coal, they make a nice fundraiser for the gov't, this of course will get passed on to the consumer through higher prices but what the heck electricity is cheap anyway. As long as china the customer is paying duty at the border too.

Mar 09 02:49 PM

[Whitehawk:]

Coal demand will be driven by China, and is one of our strong export markets. I wouldn't be shorting this sector. We will continue to use coal and to look for ways to make it more efficient and less effluent. The U.S. has one of the largest resources of this commodity. Change to other modes of energy won't happen immediately, and many of those proposed simply will not replace coal, oil, nat gas, hydro, etc. in the near future. Disclosure: I own coal, oil, nat gas and (many) solar stocks.

Mar 12 03:20 PM

[atomicdawg36:]

Umm, I think you missed something BIG in your analysis. It's not necessarily Co2 (Carbon DIOXIDE) that's the problem, if I remember my 5th grade earth science correctly. Co2 is what all humans and living animals BREATHE OUT. Co2 is processed by plants and algae, whereby they produce "O" or OXYGEN which is a by-product of their "breathing". So, Co2 is not the REAL problem. CO, on the other hand, Carbon MONOXIDE is the KILLER and toxic gas. If you don't believe me, go into your garage and close the door and start your car. See how long you last in there !! Fossil Fuel emissions produce inordinate amounts of CO. One the CO gets in the atmosphere, it's toxicity kills plants and animals. However, it also combines with free Oxygen molecules to form Co2, which then makes the inordinate amount of "greenhouse" gases that everyone is talking about, and rightfully so. You talk about 150 years ago. Well, Einstein, lets add up all the Diesel trucks and locomotives and coal fired plants from back then (oh right, that's easy, the answer is ZERO) and add to that, the population of humans producing Co2 (2 billion?? at best) and COMPARE that to the 6 billion Co2 producing people on earth now PLUS the hundreds of millions of Trains, Planes and Automobiles (sorry, I just couldn't resist) on the planet now. And you STILL seem to think it would only be 1 more tennis ball of CO in the air ??? So, either way, inordinate fossil fuel emissions are harming the environment and our planet.


On Mar 06 12:02 PM beegdawg007 wrote:

> The impact of Co2 on global warming is an issue very relevant to
> the future of coal. China and India both understand that our view
> of Co2's potential impact on the environment is, at best, silly!
>
>
> Many "real" scientists are now speaking out on this. Most are amazed
> that the junk science promoted by Al Gore has gone this far, when
> there is really ZERO evidence that our climate is behaving now, any
> differently than it has for the past 12,000 years.
>
> www.petitionproject.org/
>
> People who understand nothing at all about CO2, are now radically
> opposed to burning fossil fuels which release CO2. Most non-analytical
> people (probably 4 out of 5 people) view CO2 as a toxic gas which,
> if left unchecked, will eventually kill all life on earth. Given
> that CO2 is necessary for life to exist, this is really some marketing
> job which has been done by the Gorite camp.
>
> If you ever find yourself discussing the "horrors of global" emissions
> with a "radical believer" in the 'CO2 will kill the earth theory',
> here are two questions to ask.
>
> 1. How much Co2 is now in the atmosphere, compared to 150 years
> ago? Most will not know... the answer is 285 ppm vs. 385 ppm.
> To put that into a visual format, picture a 5 ft by 20 ft cylinder
> filled with 10,000 tennis balls, where each tennis ball represents
> some form of atmospheric gas, i.e. Nitrogen, Oxygen, Argon, Helium,
> Water Vapor etc.. , Going back 150 years ago, 3 of those balls would
> have represented Co2. Today, at 385 ppm, Co2 would be represented
> by 4 balls. So "at least" 3 out of 4 of those tennis balls were
> put in the atmosphere by mother nature. Many scientists also believe
> that a significant percentage of that 4th tennis ball is also natural.
> This they believe to be true because as the temperature of the ocean
> increases (the ocean contains 93% of all of the Co2 on earth) and
> as plant life flourishes (plants contain 2 times as much CO2 as the
> atmosphere), CO2 is released into the atmosphere. And the earth has
> definitely warmed during the past 150 years because we are exiting
> the latest phase of the little ice age. But, lets stay focused on
> the forest vs the leaves for now. All of this hysteria about fossil
> fuels and CO2 is in regard to the fact that man may have added the
> equivalent of 1 tennis ball out of 10,000 to the atmosphere in the
> past 150 years. This is extremely minimal, ant that is why CO2 is
> referred to as a trace gas in the atmosphere.
> 2. Next ask your opponent, "how much CO2 is good?" 99 out of 100
> people will have no idea how to even answer that question! The
> answer is not a precise number, but we know that plants (both land
> and marine) become more abundant and grow larger and faster as the
> amount of CO2 is increased. Based on sampling the ratio of certain
> microscopic marine critters buried in layers of deep ocean sediment,
> scientists have been able to estimate that CO2 on the planet earth
> was 4 -5 times higher than now during the Triassic and Jurassic periods.
> This 100+ million year period of time is the period of time when
> life was "most abundant" on earth. During this period, based on
> fossil evident, we know that flora and fauna were most abundant.
>
>
> To summarize my points, most people who are radically opposed to
> man's use of fossil fuels because of their fear of CO2 emissions,
> have no understanding at all of the role that CO2 plays on earth.
> Their fears of CO2 are but a boogie man that has been placed under
> their bed by politicians who clearly have an agenda that does not
> involve good science. There is ZERO real scientific data to lead
> any thinking scientist to believe that CO2 being added to our atmosphere
> at the current rate, will have any "negative" impact. We do however
> know that CO2 stimulates plant growth which has historically always
> been beneficial to earth's animals.
>
> www.petitionproject.or...;br/>
>
> 31,000 American Scientists agree with what I have just posted...
>
>
> www.petitionproject.org/

Mar 26 01:27 AM