1 Hot Commodity and 3 Super Stocks for Your Summer Portfolio
Neha is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.
For once, the U.S. Department of Agriculture’s predictions were right. Corn plantations in the U.S. were indeed at record highs this year, as stated in its latest report released last week. Companies that supply seeds or nutrients have had a roaring year so far, with top numbers and upbeat outlook. Monsanto’s (NYSE: MON) recent third-quarter numbers evidenced the solid selling season the golden crop has gifted to companies.
With the planting season behind, those who lapped up the opportunity in such companies ahead of the season must be wondering what’s next? From what I can see, USDA’s latest report and weather conditions are telling us the good times aren’t over yet for some companies.
Corn -- the hot one
All eyes are on corn yields now as farmers gear up for the harvesting season. But drought conditions can be devastating for corn crops. With the critical Midwest belt experiencing a near heat wave, fears of low yields are thick in the air. Naturally, farmers will try to get more from less. How do they do it? By applying more fertilizers. So there seem to be good chances of a surge in demand for nutrients in the near term.
More importantly, high crop prices play a major role in encouraging farmers to invest in fertilizers. Thankfully, farmers have enough reasons to do so now as fears of low harvests have driven corn futures to levels not seen in months. Corn inventories in the past three months have also come in lower than pegged after hitting an eight-year low as of March 1. Stockpiles are expected to fall further by the time we enter the harvest season—all factors that could mean possible pressure on supply.
On the other hand, demand for corn is unlikely to slow down anytime soon. In the first two months this year, the world’s biggest corn consumer, China, had already imported nearly 75% of its total 2011 corn imports. International Grains Council is predicting 50% higher corn imports from China in the next 12 months. So there could be a tight squeeze if corn harvests fail to yield much.
Which companies should one look out for in such situations?
My top picks
Two top bets are PotashCorp (NYSE: POT) and Mosaic (NYSE: MOS). PotashCorp enjoys the tag of being the world’s largest fertilizer maker and the largest stakeholder in Canpotex, the three-member legal cartel that controls all potash exports out of Saskatchewan. Mosaic is the largest producer of potash and phosphate (combined) in the world, and the second-biggest stakeholder in Canpotex.
Both these companies deal primarily in potash and phosphate—two nutrients that are applied most by farmers after nitrogen. But PotashCorp also derives a good chunk of revenue from nitrogen, which in fact is acting as a crucial driver of its top line in recent months because of low natural gas (key input) prices.
Mosaic might not be dealing in nitrogen, but the company will anyway be in better stead by next year. Thanks to two key litigations it won in recent months, Mosaic will be able to lower costs by increasing input production, and buck up revenue by selling more potash to outside customers as well as via Canpotex.
Bottom line for both companies grew at over 50% clip in the past two years. But what’s compelling is that stocks of both were kissing 52-week lows just a couple of weeks back. Though they have bounced back from there, they are still well off their 52-week highs. Plus, both are trading at lower forward P/Es, indicating possible upside.
Wait, there’s more!
Another company that comes to my mind when I think of corn and fertilizers is CF Industries (NYSE: CF). As the largest North American producer of nitrogen, CF is a clear winner when corn is high. It had one heck of a first quarter as corn plantations soared and natural gas prices dipped. The nitrogen king is also wisely upgrading large amounts of ammonia to the more profitable urea ammonium nitrate. At a trailing P/E of just over 8, it is also one of the cheapest stocks in the industry (PotashCorp sports a P/E of 13.5 while Mosaic has a P/E of 11.7).
What about the world’s largest seed maker that derives major revenue from corn seeds and traits? Well, Monsanto feels a drought would be a boon for it as more and more farmers recognize the efficacy with which its superior seeds and traits withstand adverse temperatures. Though the seed giant’s strong third quarter has already set the base for good full-year earnings, some great innovations it has lined up for hot markets like Latin America add to my optimism. But the only problem is that Monsanto’s stock seems a bit too pricey at a P/E of 20.7; and a price just short of a 52-week high isn’t comforting either. But any dip and it might be worth a look.
Some Foolish thoughts
Even if things don’t turn out as bad on the corn yield front, you shouldn’t regret having these solid companies in your portfolio. Corn is an essential crop, and its demand will only rise in the future. So instead of fussing over the unbearable heat, why not think of ways to cash in on it?
Neha Chamaria has no positions in the stocks mentioned above. The Motley Fool owns shares of CF Industries Holdings. Motley Fool newsletter services recommend PotashCorp. 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.