Stocks are at Record Highs—but You Can Still Find Growth, Safely

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With the stock market at record highs, should you be loading up—or should you lock in gains?

And like most good questions, there’s not a simple answer.  On one hand, S&P 500 companies grew earnings 6% in the most recent quarter. On the other hand, GDP only rose a scant 0.01%, and much of the corporate earnings “growth” was from cost cutting—not top line revenue.  

It can all leave you feeling a little conflicted. But rest assured that there are still undervalued growth stories in this market. Here are a few long-term winners.

The AgSuperBull

It’s true, I’ve been saying that we're in the midst of an Agriculture "SuperBull" over and over—but I promise I’m not being a “Homer.” The truth is, these stocks offer one of the truly undervalued growth stories today, despite being at or near 52 week highs.

These valuation and growth numbers from Potash (NYSE: POT) and AGCO (NYSE: AGCO) illustrate the promise in this sector.

<table> <tbody> <tr> <td>Company</td> <td>P/E</td> <td>ROE</td> <td>5 yr EPS growth rate</td> </tr> <tr> <td>Potash</td> <td>16</td> <td>24%</td> <td>16.82%</td> </tr> <tr> <td>AGCO</td> <td>9.9</td> <td>16.15%</td> <td>17.04%</td> </tr> </tbody> </table>

These companies win in two ways when it comes to numbers: they have reasonable valuations and a great history of quality growth.

But they also win in "two ways" when it comes to the growth trends of tomorrow.

In the near-term, the USDA is projecting record crop prices all the way through 2014. In the long-term, the global population is expected to eclipse 9 billion (from 7 billion today) within 30-35 years, and climate change is expected to increase drought. Furthermore, emerging middle class economies like China and India will continue to drive demand for crops higher and higher.

What does all this mean? It means that it’s highly likely that the USDA will be making record projections for the foreseeable future. All signs point to a hungrier world that’s harder to feed. That’s simply wonderful news for companies that produce farming equipment (like AGCO) and fertilizer (like Potash).

This may not be the “sexiest” sector, but if we really want to find safe growth at these levels, we should embrace the boredom.

Trade the world

Even before the “Great Recession,” growth rates in the U.S. were expected to lag emerging economies. The reason for this is that the U.S. economy is like an overcrowded mutual fund with a “star” manager--it’s just too big to out-grow its peers.

Simply put, to avoid the lofty U.S. market—trade the world.  I particularly like Russia and Canada because of their heavy (and undervalued) oil supplies. The market is simply not appreciating the fact that these two economies are providing an increasing percentage of the world’s oil supply. You can get some broad exposure to each market through ETF’s like SPDR S&P Russia (NYSEMKT: RBL) and iShares MSCI Canada (NYSEMKT: EWC).  

Aside from oil, these ETF’s offer great value because:

1). While the U.S. stock market is trading at all-time highs, both of these ETF’s are trading below their 2007/2008 highs. Russia in particular has seen a depressed stock market.

2). Since the recession Canada has seen stronger growth (GDP) and lower unemployment than the U.S.--about a percentage point better on each since 2010. Meanwhile, Russia’s unemployment rate has been far lower than the U.S. rate over the past year, hovering around 5%-6%.

Both of these ETF’s represent value, but the growth story really relies on energy. If you’re not feeling particularly bullish about the Russia/Canada energy bull—but still want some international growth--another ETF you might consider is the iShares Emerging Markets Dividend Index (NYSEMKT: DVYE). This ETF has large holdings in companies from high growth countries like Tawain (4%) and China (8%). It also holds many stocks from countries that are projected to lead their respective continent's growth, like Brazil and Poland.

The best part is that DVYE offers growth prospects and a dividend yield of around 3.5%, which is something that’s hard to find in the U.S. Foreign interest rates and dividend yields largely outpace those in the U.S. 

The ten second takeaway

With quantitative easing forcing us into a stock market that’s already at record highs, it’s easy to feel conflicted. That’s ok--I’m conflicted too!

Please take a moment to try this exercise. Close your eyes and imagine it’s the year 2025—what does that world look like? Which trends “won out?”

Now open your eyes. I strongly feel these investments will reflect many of those stories, don’t you? The difference is (hopefully) the market hasn’t completely noticed yet, and we still have time to invest.

We still need growth stories that we can trust--even at these levels.


mrrightside has no position in any stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. 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. Is this post wrong? Click here. Think you can do better? Join us and write your own!

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