Taking Advantage Of Overblown Drought Fears

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 |  Includes: AGCO, DE, POT
by: Bret Jensen

The massive drought hitting the midsection of the country has gotten a lot of play in the press recently. It has also generated the usual stories about the plight of the poor American farmer. I am sorry for not being empathetic, but with the possible exception of my golden retriever Cooper, there very few segments of society more pampered than the "Poor American Farmer." There definitely is no subset of our population that wields as much political influence or receives more subsidies, price supports and handouts compared with their relatively small numbers (about 1% of the population).

Being a farmer in this country is a win-win proposition. If a drought hurts a farmer's crop yields, the government comes through with crop insurance and other programs that make him whole. If a farmer is fortunate enough not to be in an area affected by the drought or other natural disaster, he steps right up and collects 25% to 50% more for his crop due to the reduced supply in other parts of the country. That being said, this is not a political site, it's a stock picking site, so let's get to it.

The USDA just forecast that farm income will be a record $122.2B this year, up almost 4% over 2011, despite the "hardship" of the drought. Some of the larger agricultural equipment and fertilizer firms have significantly underperformed the market over the last month (see chart). A good portion of this underperformance has been triggered by concerns that farmers would not have the funding to buy their goods. Since this concern is overblown, here are three cheap Ag stocks that offer attractive entry points.

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"Deere & Company (NYSE:DE) provides products and services primarily for agriculture and forestry worldwide." (Business description from Yahoo Finance)

Three reasons DE is a solid bargain at under $74 a share:

  • The stock sells for less than 10 times forward earnings, a discount to its five year average (14.5). It also yields 2.4%.
  • Deere is a good proxy for the long term secular trend of growing food demand in a developing world. Currently, the market seems to be mispricing these growth prospects given the stock's five year projected PEG (.80), a large discount to its five year average (1.5).
  • The 17 analysts that cover the stock have a median price target of $86 a share on the stock. DE is rated an "outperform" at Credit Suisse with a $90 price target.

"AGCO Corporation (NYSE:AGCO) manufactures and distributes agricultural equipment and related replacement parts worldwide." (Business description from Yahoo Finance)

Three reasons AGCO has upside from under $42 a share:

  • The median price target for the 16 analysts that cover the stock is $55 a share. AGCO sells at just over 7 times forward earnings, a deep discount to its five year average (14.9).
  • The company has beat earnings estimates each of the last 12 quarters. The average beat over consensus during the last four quarters has averaged 20%.
  • The stock is trading near the bottom of its five year average based on P/E, P/S, P/CF and P/B. AGCO is also trading at a low five year projected PEG (.59).

"Potash Corporation of Saskatchewan (NYSE:POT), together with its subsidiaries, produces and sells fertilizers and related industrial and feed products primarily in the United States and Canada." (Business description from Yahoo Finance)

Three reasons POT offers a great entry point at under $41 a share:

  • The stock is trading near the bottom of its five year average based on P/E, P/S, P/CF and P/B. It also has an A- rated balance sheet.
  • The median price target for the 28 analysts that cover the stock is $53.50 a share. S&P has a "buy" rating and a $59 price target on POT.
  • The stock has solid technical support at just under current price levels (see chart).

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Disclosure: I am long DE, POT. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.