Fertilizers. Almost without exception, fertilizer stocks have under-performed the market since last summer. The ETF’s top ten holdings, as of March 13, include Mosaic (up 9.9% since July piece), Potash (-9%), Agrium (8.5%), and CF Industries (0.9%).
Flooding Profits Over 10-Year Period, Too
Here’a a long-term perspective. (PAGG, the ETF, was started in 2008.)
This chart shows how cyclical these stocks are. However, even with the huge price drops during the Great Recession (in gray), it took Valmont only about three years to reach (before it went on to surpass) its previous high and Deere about five years. These figures underscore the case for buy-and-hold long-term investing, even for highly cyclical stocks. The caveat: as long as one selects solid stocks initially.
Ag Irrigation Stocks: Going Forward
2013 Season Outlook:
Early data indicates the 2013 agricultural season will be strong, as both companies had record backlogs for irrigation systems in the previous quarter. Additionally, many of the same factors that existed in 2012 exists: anticipated record planting; drought, or at least very dry conditions, in some agricultural regions.
As per a recent Business Week article, “The combined plantings of wheat, corn and soybeans in the U.S. this year may be the most since 1982 and corn and soybean harvests could be the biggest ever, Glauber said last month at the USDA’s annual outlook forum.” Joe Glauber is the USDA’s Chief Economist.
The long-term drivers are drivers for 2013, too.
Long-Term Growth Drivers:
1. US (& Global) Warming Trend
We’re in a long-term warming trend. People may disagree about the cause, but that’s not relevant here.
The fact that it’s getting warmer means water efficiency, which has always been an important factor for those engaged in agriculture, is becoming increasingly critical. This is a positive for companies manufacturing center pivots, as they are the most efficient form of irrigation.
2. More Mouths to Feed
The global population is ballooning. All those “new” people need to eat, so more food is needed. More acreage is needed to grow more food; that new area will need irrigation systems.
Additionally, the more the population expands, the less acreage is available for farming. So, increasing yields within a given area is also becoming more crucial. Also, much of the most desirable areas for farming already is used for farming, so less desirable areas are being converted to agricultural use. Water efficiency is critical with both factors.
Bottom Line
Valmont and Lindsay Corporation (NYSE:LNN) continue to look like promising investments given the long-term growth drivers discussed above.
Valmont would likely better suit most individual investors given its more diversified, and its stock price is less volatile. (A main negative is its large debt load, which Part 2 will cover.) Those who keep a closer eye on their holdings might want to consider Lindsay.
Stay tuned for a quantitative analysis on these companies that slices & dices the numbers.
The article Irrigation Stocks — A Pre-Planting Season Check-up originally appeared on Fool.com and was written by BA McKenna.
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