2 Agriculture Stocks for Young Investors’ Retirement Portfolios

Source: Thinkstock

Source: Thinkstock

I recently wrote a couple of articles (you can find them here and here) providing 10 tips to young investors who are preparing for retirement. While I won’t go into the details here, two tips in particular that I provide include:

  1. Buy assets that will perform well over the long run.
  2. Invest in assets that are in secular uptrends.

If you isolate long-term opportunities that will perform well even if the economy is weak, then you will have more confidence in buying such assets on weakness.

I think one such opportunity that makes a lot of sense for young investors looking for stocks to hold for many years and even for decades is agriculture. Investments in agriculture are extremely simple to justify without the esoteric knowledge required to successfully pick stocks in many other sectors (e.g. biotechnology, information technology, additive manufacturing or “3-D printing.”)

The global population is growing and people need to eat. Companies that contribute to food production in a way that generates value are going to be profitable. If this isn’t the case then these companies will lose money, go bankrupt, and food production will decline. This would lead to mass-scale starvation. While the latter scenario is possible, it is extremely unlikely, and if it were to play out then we would have bigger problems than losing money on our investments.

Since agriculture will almost certainly be a profitable endeavor going forward, I think there is good reason to include shares of agriculture companies in your portfolio. But which ones? The companies that are the most likely to be among the best performing in the agriculture space are those that are going to be supplying the market with products that improve efficiencies. These companies can either aid in decreasing the cost of farming (i.e. increase margins), or they can aid in increasing crop yields (i.e. increase sales.) Let’s look at one of each.

Lindsay Corporation (NYSE:LNN) is going to help farmers decrease the cost of farming. The company produces irrigation systems that help farmers in two ways. The first is that they enable farmers to utilize water more efficiently by determining which areas of a farm need water. The second is that they make it easier for farmers to water their crops as a Lindsay central pivot irrigation system is able to do this automatically. Farmers can therefore spend less money on water and more time working on other aspects of their businesses.

Lindsay Corporation, like many agriculture companies, is seeing profits decline. Last quarter’s EPS fell by about 30 percent year-over-year due to lower demand for Lindsay’s products resulting from lower crop prices. If crop prices are down, then farmers are earning less money and they therefore have less money to spend on products such as a Lindsay irrigation system. However, it seems that the prices of agricultural commodities have bottomed, and this should put a floor under Lindsay’s sales. With the cash backed out Lindsay shares trade at just 15-times earnings, which is well below the S&P 500 that trades at over 20-times earnings. The company also has no debt. While the shares are down about 7 percent year-over-year versus the S&P 500, which is up 18 percent year-over-year, I think its underperformance will be short lived, and now is a good time to pick up some Lindsay shares for the long-term.

The Mosaic Company (NYSE:MOS) is going to help farmers increase crop yields, and by extension, their revenues. The Mosaic Company produces fertilizers. Shares have been hit by a trifecta of bad news over the past few years, which makes them especially attractive now for long-term investors. First, we have had a decline in crop prices that has led to a fall in fertilizer prices. This took a big toll on the company’s Q4 profits, which fell by about two-thirds year over year. Second, in 2011 we learned that majority shareholder — Cargill — planned on selling its 60+ percent stake in the company over a period of years. This has been adding supply to the market as these shares find homes in other portfolios.

Third, last year the Russian potash producer Uralkali decided that it was no longer going to limit its potash production, and this took a toll on every global potash producer, Mosaic not excluded. However, the decline in Mosaic shares was overdone given that the company gets most of its revenues from phosphate and nitrogren-based fertilizers.  Nevertheless the Uralkali announcement spooked investors who shot first and asked questions later.

Mosaic’s earning are going to be depressed for the next few quarters given low fertilizer prices. However, as crop prices rise, so will fertilizer prices, and as a result there will be renewed interest in Mosaic shares. With the stock trading at just over a fourth of its 2008 all time high, I think now is an excellent opportunity for long term investors to take a position.

Disclosure: Ben Kramer-Miller is long Lindsay Corporation and the Mosaic Company.