As corn prices rise, the incentive for farmers is, of course, to plant more of it. Back in January, we looked at fertilizer company CF Industries (CF, $204), but our investment thesis had nothing to do with any possible drought conditions--it is hard enough to forecast stock prices, let alone the weather. That thesis still rests on two factors, the first being the growing global demand for more dietary protein. As economies develop, their populations shift their diets to include more protein, and that means more corn to feed to all the needed livestock--our cows, chickens, and pigs. Here we'll just underscore the caveat that secular trends don't necessarily translate into profitable investment opportunities, at least not in the short run. It's like assuming that the onslaught of the retiring baby boomers will make it a good idea to invest in nursing homes and Winnebagos--there are many other intervening factors to consider. The closer at hand catalyst for CF has been the declining price of natural gas, a key component in the production of nitrogen fertilizer (and if you'll recall, nitrogen is essential for corn, whereas soybeans make their own nitrogen). CF, now up 40% year-to-date, has been sitting pretty with these tailwinds, one long term and one short term. The drought has put the fertilizer stocks back in the spotlight, at least for a time, giving another boost to the shares.
Short term (we hope) conditions such as the drought can act like a train conductor stepping onto Wall Street and screaming, "All Aboard!" If it's not raining, we'll just invest in irrigation equipment companies--such a no-brainer that jumping on that train might suggest you have no brains at all. Lindsay (LNN, $71), a prominent maker of irrigation equipment, has risen some 23% since the end of June, the lion's share of its advance since the beginning of the year. I can't say whether or not LNN would make a compelling investment (I don't follow the company), but I strongly suspect that investors have now bid up the stock to reflect a best-of-all-worlds increase in sales of its equipment. It will be too late to save this year's corn crop, but when the nation's breadbasket finally gets a good soaking, the investor enthusiasm for LNN will probably wane. We saw similar sentiment at work with Lions Gate Entertainment (LGF, $13), which rallied strongly in advance of the release of The Hunger Games, reaching a high of $16.19 in March. The box office for the movie was robust, but it really couldn't have been any more robust than what was expected--and factored into the stock price. LGF now trades at $12.82, awaiting another celluloid catalyst.
What is an investor to do? First of all, recognize that the pursuit of quick and easy profits does not make for an investment strategy. Is the current condition, whether a drought or a movie hit, indicative of a longer-term, sustainable trend? We are more likely to find those enduring trends in the areas of healthier eating, benefitting the likes of Whole Foods Market (WFM, $95) and Hain Celestial (HAIN, $56); discount shopping at TJ Maxx (TJX, $45) and Ross Stores (ROST, $67); and big data analytics with firms such as Teradata (TDC, $69). Those trends are well-known also, but they are less likely to be seen in hindsight as one-off events.
Getting back to the farm, I want to add Raven Industries (RAVN, $33) to our Radar Screen, one reason being that it doesn't seem to be on many other radar screens. The little-known (on Wall Street) company makes products for what is known as precision agriculture, which basically means the use of computer technology to improve crop yields. Unlike Oliver Douglas (Eddie Albert, pictured above in Green Acres), farmers today have access to technologies that bring precision to planting and the application of fertilizers and other chemicals. This includes the use of GPS-guidance and a RAVN product known as Slingshot, which allows all of this to be controlled through a wireless cell phone network. The company also is doing good business with its reinforced plastic sheeting, which is used as pit liner in the oil and gas industry. Also, RAVN is the only supplier of high-altitude research balloons. The next time you think you have seen a UFO, it might be one of those devices.
The Market and the Economy
As seasoned investors know, the stock market can be as fickle as J.R. Ewing in a discount brothel. Which economic indicator will the market dance (ahem) with today? For about the past year, the market has not taken well to disappointing economic news, whether that news is of slowing growth domestically or weakness in Europe and China. Over the past few weeks that focus seems to have shifted somewhat, with the market hoping for--and expecting--some additional monetary easing from our Federal Reserve and other central banks around the globe. That could lead us to a sentiment similar to what was common in the strong economy of the 1990s--when really good economic news was actually bad news for the market, because it raised the specter of higher interest rates from the Fed. This time, though, signs of continuing weakness in the economy--and especially in the labor market--will be perceived as putting more pressure on the Fed to undertake another round of Quantitative Easing. That may be one reason why the market is up strongly this morning (Friday), with its new dance partner being the uptick in the unemployment rate. Watch out, because when the market doesn't get what it wants--and expects--it can get ugly. Just like J.R. Ewing.
Life is short, Get busy.
Jim
Disclosure/Disclaimer: My family members and/or I own shares of CF, WFM, HAIN, TJX, ROST, TDC, and RAVN. Individual stocks are mentioned here for the sole purpose of illustrating investment concepts, and nothing stated here should be construed as the advice to buy or sell any security. Stock prices are as of Friday morning, August 3rd, 2012.
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