Last year was not kind to many of the commodity-related stocks. One sector hit hard by falling agriculture prices and a slow global economy were the agricultural commodity stocks. The sector as measured by the Market Vectors Agribusiness ETF (ARCA:MOO) was down 11.6% in 2011 versus a flat S&P 500.
That was last year and this is a new year for the sector. Through the first two weeks of 2012 MOO is up 6% and on the verge of breaking out to a fresh two-month high. The recent most recent move higher was led by a report out of Argentina that the corn and soybean crops will be lower than expected.
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Two stocks that were helped by the news out of Argentina were Potash Corp of Saskatchewan (NYSE:POT) and CF Industries (NYSE:CF). POT is the world's largest crop-nutrient producer by market value and CF is the largest U.S. maker of nitrogen fertilizer.
POT hit a new six-week high on the news and is now well off the 14-month low it hit in December 2011. It appears the bottom may have been found for the stock and more upside could be in the future. The stock is attractive fundamentally, with a PEG ratio of 1.09 and a forward P/E ratio of 11.12. A small dividend yield of 0.6% is not a difference maker.
The chart on CF has been much better than POT, as it is only 11% from hitting an all-time high. Even with the more attractive chart, the fundamentals on CF remain attractive with a PEG ratio of 0.44 and a forward P/E ratio of 7.6; the dividend yield is 0.9%. Looking at the chart of CF with the price at $172, I would be cautious buying here, however on any pullback near $160 it seems like a no-brainer with the attractive fundamentals.
POT is one of the most heavily weighted of the 47 stocks that make up MOO, currently number two with an about 8% allocation. The U.S. accounts for 38%, followed by Canada (13%) and Singapore (12%). The majority (80%) of the stocks are considered large-caps with market caps above $5 billion. The net expense ratio is 0.56% and the ETF currently has $5880 million in assets under management.
CF is the number one holding in the Global X Fertilizers/Potash ETF (ARCA:SOIL), making up 6% of the allocation. The number seven holding is POT, making up 5% of the ETF. The U.S. is the largest country with 22%, followed by Israel (14%) and Canada (11%). The ETF follows an index that attempts to track the performance of the most liquid and publicly traded companies that are involved in the fertilizer industry in some aspect. The ETF is up 5.5% through the first two weeks of 2012 and charges an expense ratio of 0.69%.
With the first two ETFs concentrating mainly on the large cap stocks the Index IQ Global Agribusiness Small Cap ETF (NYSE:CROP) offers exposure to an untapped portion of the sector. The ETF includes companies involved in everything from chemicals to crop production to agricultural machinery. The ETF is lagging its peers with a loss of only 0.65% in year-to-date 2012, but the chart has been constructive in the last two months. The expense ratio on CROP is 0.75%. (For related reading, see 4 Ways To Use ETFs In Your Portfolio.)
The numbers show agriculture stocks as being value plays when compared to the overall market. Considering the need for their products, as there are more mouths to feed and a questionable supply, it makes sense to buy into the sector off the highs. Keep in mind, crop reports and global growth concerns could derail any rally that began late last year. (For additional reading, check out 5 Must-Have Metrics For Value Investors.)
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At the time of writing, Matthew McCall did not own shares in any of the companies mentioned in this article.