Week 284 - Barron’s 500 List: Food and Agriculture Companies

Situation: There is some evidence that a new Commodity Supercycle is starting. For example, the Dow Jones Commodity Index recently recalled its 1998 low and is now rising. Corn and soybean prices have stabilized well above their 1999 low. We recently took a close look at all of the larger companies supporting Agriculture Production (see Week 279) and concluded that fundamental metrics are on the upswing, in spite of a February 2016 Bear Market in commodity-related stocks. Now 9 months have passed and we need to again look closely at the data while adding Agriculture Processing companies to our analysis. 

If, after closer study, you’d still like to buy stock in one of these companies, you need to understand that you’d be making a “risk-on” trade with multiple opportunities for loss. For example, the February 2016 Bear Market apparently arose because  “...investors’ appetite for riskier securities nose-dived early in 2016 [due to] concerns about an economic slowdown in China and the U.S., falling commodities prices, and the uncertain direction of interest rates were roiling global markets.”

Mission: Capture data on all Food and Agriculture companies in the 2016 Barron’s 500 List that have S&P stock ratings of B+/M or higher. Include columns that note whether the 200d moving average of a stock’s price is moving higher, and whether the 50d moving average has risen above the 200d average to lead it higher. Also include 2 columns that compare the 2016 brand rank to the 2015 brand rank among the top 500 global brands, and 3 columns to assess whether the company has a clean Balance Sheet.  

Execution: see Table.

Bottom Lines: Food and Agriculture companies have been struggling over the past 4 years, along with other commodity-related companies. Hundreds of billions of dollars were invested in expansion projects, which became monuments to futility as the buildout of China’s infrastructure suddenly sputtered. The world now has the capacity to produce, process, transport, and market more oil, natural gas, coal, gold, steel, aluminum and protein-rich foods than it needs. That means the prices that food processors are asked to pay for corn and soybeans have fallen, but the good news is that those prices are now coming off historic lows relative to inflation.

Multi-decade commodity cycles have been with us forever and a new one appears to be starting, now that a number of production companies have gone bankrupt and all of those remaining have drastically curtailed their expansion plans. “Dr. Copper” is the generally accepted as the main barometer for expansion vs. contraction in commodity production. Freeport-McMoRan (FCX) is the largest company that mainly produces copper (see Line 24 in the Table). Caterpillar (CAT) is another widely-accepted barometer (see Line 10 in the Table). With regard to stock prices, the 200 day moving averages for both companies bottomed in the early summer and have been rising steadily since the late summer (see Columns AE-AF in the Table).

Risk Rating: 8 (where a 10-yr US Treasury Note = 1, and gold bullion = 10).

Full Disclosure: I dollar-average into MON, and also own shares of CAT, HRL, KO, and ADM.

NOTE: Metrics are current for the Sunday of publication. Red highlights denote underperformance vs. VBINX at Line 27 in the Table. Purple highlights denote Balance Sheet issues and shortfalls. Net Present Value (NPV) inputs are described and justified in the Appendix to Week 256. Briefly, Discount Rate = 9%, Holding Period = 10 years, Initial Cost = average stock price over the past 50 days (corrected for transaction costs of 2.5% when buying ~$5000 worth of shares). Dividend Growth Rate is the 3-Yr CAGR found at Column H. Price Growth Rate is the 16-Yr CAGR found at Column K (http://invest.kleinnet.com/bmw1/). Price Return (from selling all shares in the 10th year) is corrected for transaction costs of 2.5%. The Discount Rate of 9% approximates Total Returns/yr from a stock index of similar risk to owning a small number of large-cap stocks, where risk due to “selection bias” is paramount. That stock index is the S&P MidCap 400 Index at Line 33 in the Table.

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