Profit from the Drought in the Midwest
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Drought conditions in the Midwest farm belt region of the United States are now the worst in more than five decades. As a result, the price of corn and soy beans has skyrocketed. The United States provides more than 40% of the world's corn supply and the exchanged traded fund for the grain, Teucrium Corn (NYSEMKT: CORN), has risen 38.04% for the last month of market action, as a result.
To profit from the drought, investors should look at buying shares of the companies that have suffered the most. On October 16, 2008, deep into The Great Recession, Warren Buffett wrote an op-ed for The New York Times entitled, "Buy American. I am."
About his mode of investing, Buffett wrote in The New York Times: "A simple rule dictates my buying: Be fearful when others are greedy, and be greedy when others are fearful. And most certainly, fear is now widespread, gripping even seasoned investors. To be sure, investors are right to be wary of highly leveraged entities or businesses in weak competitive positions. But fears regarding the long-term prosperity of the nation’s many sound companies make no sense. These businesses will indeed suffer earnings hiccups, as they always have. But most major companies will be setting new profit records 5, 10 and 20 years from now."
It is time to "..be greedy when others are fearful..." about Hormel Foods (NYSE: HRL), Archer Daniel Midland (NYSE: ADM), Kansas City Southern (NYSE: KSU) and Tyson Foods (NYSE: TSN) due to the adverse impact that the drought in the Midwest and the resultant higher price of corn and soy beans has had on the stock price of these "many sound companies." From this, profits will be earned when the farm belt recovers, which it will.
Hormel Foods and Tyson Foods are firms in the meat business, for which corn is used as feed for the livestock. When the cost of corn goes higher, lower are the profit margins and stock prices headed for Tyson Foods and Hormel Foods. So, while Teucrium Corn is up almost 40% for the last four weeks of trading, Hormel Foods has fallen by 2.78% and Tyson Foods is off by 16.55%. Tyson Foods was recently lowered from Buy to Underperform by CLSA.
Agricultural goods being carried as freight has declined for Kansas City Southern; and so has the share price for the railroad based in Kansas City, Missouri. Over the last week of trading, Kansas City Southern has augered by more than 2%. The share price is down more than 5% for the quarter.
Archer Daniels Midland "procures, transports, stores, processes, and merchandises agricultural commodities and products in the United States and internationally" from its headquarters in Illinois. The stock price for Archer Daniels Midland has fallen in trading for the last week, month, quarter and 52 weeks. Year to date, Archer Daniels Midland is off 4.88%. For the four weeks of market action, Archer Daniels Midland has plunged by 13.92%.
The drought is a short term event that will result in long term gains for investors in these companies. Each of these firms is profitable and has sales growth increasing on a quarterly basis. Reinforcing the positive long term outlook for each is a high level of institutional ownership and a low short float. When institutional investors, such as mutual funds or pension groups, buy the shares of a company, that is a bullish sign. These investors have deep research resources and are sought after by all businesses.
Kansas City Southern has a healthy profit margin of 15% with sales increasing by 12.05% on a quarterly basis with institutions owning more than 86% of the stock and a short float of just 1.54% (a short float of 5% is considered to be troubling for a company). Archer Daniels Midland has quarterly sales growth of 5.37% and a profit margin of 1.37% with institutional ownership over 70% and a short float under 1%. Tyson Foods has a profit margin of 1.82%, quarterly sales growth of 3.35%, institutional ownership of 88.31%, and a modest short float of 3.37%. For Hormel Foods, the profit margin is 5.91% with quarterly sales growth of 2.75% and institutional ownership at 33% and a short float of 4.30%.
The higher cost of corn and soy beans will squeeze the margins for the near future, but increased profitability will eventually be restored. Coupled with the sales growth, that results in a bullish future for each stock as all are profitable. The profit margins will improve when corn and soy beans fall in price. The institutional ownership manifests that sophisticated investors have rendered an imprimatur of approval on each. The low short floats reveal that not many are betting on greater declines in the stock prices.
In the Fall of 2008, Buffett was "...greedy when others are fearful..." and invested billions in Goldman Sachs and General Electric. He bought Burlington Northern Santa Fe railroad for the portfolio of Berkshire Hathaway in 2009, which was a terrible year for that sector. From these investments, Buffett did very well. It is now a similar period for companies suffering from the higher costs of corn as a result of the drought in the Midwest. The stock prices of Tyson Foods, Kansas City Southern, Archer Daniel Midland and Hormel Foods will all float higher when the rains return to the Midwest.
jonathanyates13 has no positions in the stocks mentioned above. The Motley Fool owns shares of Archer Daniels Midland Company. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.If you have questions about this post or the Fool’s blog network, click here for information.