By David Sterman
Billionaire investor George Soros and his team of advisors take a "top-down" approach. This means they seek out big, "macro" investing themes, and then work their way down to the best ways to play that theme. Every quarter, they adjust their stakes in a range of companies, either by loading up or pulling back, while also looking to enter a few new positions.
In the most recent quarter, Soros, through his financial services company Soros Fund Management, added two brand new positions to his portfolio. Each could be viewed as a proxy for major themes playing out in the global economy.
This ticker symbol says it all. Adecoagro owns and operates nearly 40 massive farms in Brazil, Argentina and Uruguay, a region known for fertile and productive land. Indeed, agriculture has always been the leading export in Argentina, but it also now holds the top spot in Brazil's export economy. This isn't just a play on soybeans or wheat; it's also a play on cotton, rice, sugar cane-based ethanol, dairy cows, coffee, sugar and other commodities. This all means Adecoagro's annual results aren't subject to the vagaries of volatile prices for any particular commodity, though it surely helps that just about all the items noted above have seen a surge in price in recent quarters.
Soros' $330 million investment (of roughly 27 million shares) in Adecoagro is the perfect play for the ongoing global demographic changes that are taking place. As the global population continues to rise, the amount of unused arable land continues to shrink. In addition the growing middle classe in many emerging markets are consuming ever more calories on a per-capita basis.
Beyond the demographic appeal of South American agriculture, Soros has likely spotted three other reasons to own this stock. First, operating income appears set to rise nicely in the near-term, from $74 million in 2010 to more than $150 million this year, and to $200 million by 2013, according to one of Brazil's largest banks, Banco Itau (ITU).
Second, high-quality agricultural land is becoming a scarce commodity as new cities pop up in formerly rural areas of South America and Asia. Soros likely anticipates solid appreciation potential in the land Adecoagro holds.
Third, Adecoagro plans to aggressively ramp up its ethanol business. Unlike the U.S. production of corn-based ethanol, which needs the help of government subsidies, Brazil's sugar cane-based approach is considered to be more cost-effective and more environmentally sound. In a world of high oil prices, sugar cane-based ethanol is likely to see rising demand.
Adecoagro pulled off a $12 IPO in late January, rose higher, and now trades right at the offering price. The main reason for the underwhelming post-IPO action is in the complex nature of the company's business. In effect, investors need to figure out a value for each distinct business group. For example, the ethanol business alone is likely worth about $1 billion, according to Banco Itau. The bank's analysts think shares deserve to trade up to $16 (implying a 30% gain) over the course of this year, and perhaps well higher down the road as the company's growth plans come into focus and its real estate holdings appreciate in value.
Look for Soros to hold this stock as a key long-term position for his eponymous investment fund. For the rest of us, Adecoagro provides a way to get into farming without getting down in the dirt, as I discussed in this article earlier this year. The bottom line is that farmland has been a solid investment for a long time and will likely remain so for many years to come.
One of the most stunning consequences of the recent global recession was the absolute implosion of demand for new cars and trucks. Many key auto makers and their key suppliers had been used to operating with lots of debt, so when the downturn hit and sales began to slide, they either had to cut costs drastically, seek government bailouts or file for bankruptcy, as was the case with General Motors (GM) and Chrysler in 2009. Visteon, which is an auto-part maker and a Ford Motor (F) spin-off, couldn't avoid the maelstrom and sought bankruptcy protection as well.
But that's beginning to look like ancient history now: Visteon went public once again last October (with a much cleaner balance sheet) and saw its shares rise from about $50 to $75 before a recent pullback down to $61. Soros' firm established a new 2.1 million share position (worth about $125 million), presumably after the stock suffered a 20% drop in just two days in early March, after announcing a year-over-year decline in first-quarter sales and profits.
So why would Soros buy a stock that is in the midst of a slump? It's because the slump likely won't last. A series of headwinds recently emerged in the auto sector, most notably a spike in raw material prices, which I noted in a recent analysis of Ford's stock.
Yet the longer-term outlook remains quite bright. Industry sales are expected to continue to rebound in the next few years. Visteon is now much leaner and could generate peak profits in coming years. The company has closed roughly 50 plants, seen its operating margins expand 500 basis points to 4% and looks positioned to get that figure up to 6% or 7% in a few years as revenue rises.
Investors need not worry that the company's prospects are simply tied to those of Ford -- the auto maker accounted for 88% of sales a decade ago, but today accounts for just 25%. (Hyundai (GM:HYMLF) is actually the biggest customer now, accounting for 28% of sales -- a real blessing when you note Hyundai's robust market share gains taking place right now.)
Weak first-quarter results surely hurt the company's near-term momentum, but analysts at UBS still think shares hold real value. They recently lowered their target price from $85 to $78. This is still nearly 30% above the current price. But Soros may need some patience: "While we still like the long-term story, (2011) guidance will likely raise investor concern about the company and may keep the valuation depressed until investors can gauge how much the weak guidance reflects management conservatism vs. fundamental issues with the business," note the UBS analysts.
Soros is clearly bullish on agriculture and the auto industry, as his recent purchases highlight. Piggybacking on his moves has proven quite fruitful for investors in the past and could be the case with Visteon and Adecoagro as well.
Disclosure: Neither David Sterman nor StreetAuthority, LLC hold positions in any securities mentioned in this article.