Friday morning we got some disappointing news about slowing sales at Caterpillar (NYSE:CAT). There's been a softening of orders in new machinery / equipment tied to global infrastructure and agriculture, which has led the company to slash costs and forecasts.
Earlier this month, we heard a similar story from Deere (NYSE:DE), which has seen orders for agricultural equipment drop sharply.
You might be tempted to conclude that weak orders for agricultural machinery equates to a weak outlook for "ag" as an industry. It doesn't. You just need to pick your spots.
My checks of farmer demand indicate that, while uncertainty about the global economy remains a concern, farmers still need to grow their crops. To get the most from their crops, demand for nutrients, chemicals and fertilizer remains very high. Suppliers I've checked in with are very happy about orders for the coming season.
My two favorite nutrient/fertilizer plays here are Potash (POT) and Agrium (AGU) -- with trailing enterprise-value-to-EBITDA ratios of under 6 times and 4 times respectively. Both should see their stocks rise over the summer as results come in.
Ag makes sense. You just have to realize that not all in the space are created equal at this stage in the cycle.