One way in which I would be hesitant to invest, is in the Ethanol stocks. My personal belief is that the hype that is associated with Ethanol may be overdone, considering all of the negatives including the subsidies necessary, the acreage required, and the possible political risk.
One of my favorite agricultural stocks is Monsanto (MON). Monsanto is a leading supplier of agricultural products including soybean, corn, canola and cotton seeds as well as many vegetable seeds. It also has a number of products including genetically modified corn and soybeans and other seeds that are more resistant to pests and drought. It has just recently obtained approval from Canada for its soybean technology.
The positives for the company include an operating margin of approximately 20%, a gross profit of approximately 3.5 billion dollars, and very low debt. In addition, because of the Ethanol demand, their corn seeds are in great demand. This is a global company and its products are used all over the world for a growing population with increasing wealth. The downsides that I see for the company are a trailing PE of 35, making it relatively expensive, and the fact that, while there has not been a lot of insider selling, the percentage of insider ownership is on the low side.
The other company that I think very highly of is Potash Corporation of Saskatchewan (POT). This company engages in the sale of fertilizer and feed products. It has nitrogen facilities in multiple areas of the United States and the overseas. I believe the basic factors that make this stock valuable is the growing wealth in heavily populated, emerging market areas. It requires a per-capita income of three thousand dollars a year in order to have the money to be able to purchase necessary items for their growing population.
Obviously, one of their main staples is food, and the best way to increase food production is with the use of fertilizer. For every thousand dollars of fertilizer used, one is able to grow an additional three thousand dollars worth of food. Potash is particularly well positioned both because of its size and because it has a significant production reserve that allows it to increase production with the increasing demand.
There are other fertilizer companies and many have done well. POT is one of the largest fertilizer companies and unlike many; it has a global reach, and an ability to increase their production. The positives include: significant growth, an excellent chart, a strong net profit margin, and minimal debt. The negatives include phenomenal growth with almost 400% return in three years, and a trailing PE of 32.5.
While both of these company’s have had strong run-ups, I believe that the basics of what they do and how well these companies are run make a compelling case for strong further increases in their stock value.
MON-POT 1-yr chart: