Archer Daniels Midland Company (ADM), Bunge Ltd (BG), Cosan Limited(USA) (CZZ): Dangerous Valuations in Farm Products

Held up by a string

Cosan Limited(USA) (NYSE:CZZ) has great potential because of its diverse use of sugar cane. With 600,000 hectares of production space and a rich environment in which to produce its bioethanol, Cosan Limited(USA) (NYSE:CZZ) has plenty of opportunity to ply its trade with amazing results. Operating in Brazil, which prohibits the sale of gasoline automobiles, is also a boon for the company. This is not even counting the fact that having much of its operation take place in Latin America provides plenty of growth potential due to the heated economies in the region.

However, there are issues to be found here. For one thing, Cosan Limited(USA) (NYSE:CZZ) is a bit pricey at around 24 times its earnings. The company is also one of the higher priced in its industry on a book value basis, trading at a book multiple of 1.5. But beyond the valuations, there is ample danger because Cosan Limited(USA) (NYSE:CZZ) is only pulling in 1.4% profit margins. This presents high risk that something could go wrong, the company could slip into unprofitability and the share price could plummet. I would recommend waiting on Cosan Limited(USA) (NYSE:CZZ) until the profit margins rise before moving on this opportunity.

The Foolish bottom line

The farm-products sector is critical for society, but it’s not necessarily critical for your portfolio. As the saying goes, sometimes discretion is the better part of valor. The stock of even the best company isn’t a great investment unless you can buy it for a good price.

The article Dangerous Valuations in Farm Products originally appeared on Fool.com and is written by Chris Hodge.

Chris Hodge has no position in any stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. Chris is a member of The Motley Fool Blog Network — entries represent the personal opinion of the blogger and are not formally edited.

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