Agricultural Chemical Leaders

By Matthew McCall | February 28, 2012 AAA

A 13% rally in 2012 to the best level in six months is good enough to beat the S&P 500 by nearly 500 basis points. Even with the big move to begin the New Year, it has not been enough to get this sector exchange-traded fund (ETF) back near the highs set in early 2011. The Market Vectors Agribusiness ETF (ARCA:MOO) is this ETF.

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The agricultural chemical and related sectors struggled in 2011, lagging the overall market, but so far in 2012 they are trying to get back to being the leaders they have been the past few years.

Agricultural ETFs
There are several ETFs that take aim at the agricultural equity sector and each has its own technique of achieving that goal. The ETF mentioned above, MOO, is the largest of the group with nearly $6.2 billion in assets under management. The ETF is composed of 47 stocks in the sector with the majority (82%) falling into the large cap asset class. The United States and Canada account for half of the holdings, with a myriad of foreign countries making up the other 50%. The expense ratio is 0.56%.

The Global X Fertilizers/Potash ETF (ARCA:SOIL) has slightly outperformed MOO in 2012 with a gain of 15%. The 29 stocks in the ETF are all involved in the fertilizer business in some manner. The U.S. and Canada make up 38% of the ETF that charges an expense ratio of 0.69%. The major difference is the makeup of the two ETFs, even though they may sound similar, the holdings are not comparable. With MOO, investors get exposure to the big names in the agricultural sector, whereas with SOIL it is composed of international names that are specific to fertilizers. (For related reading, see An Inside Look At ETF Construction.)

Agricultural Stocks
American Vanguard Corp
(NYSE:AVD) makes chemicals for the agricultural industry that includes insecticides, soil fumigants and growth regulators. The stock has had a great run recently and is at the best level since 2008. With a PEG ratio of 1.62 it falls into the fairly valued camp, however it is tough to ignore the chart. The key is patience with AVD; let it pull back to near $15 for a buying opportunity. The current dividend yield is 0.6%.

Rentech Nitrogen Partners LP (NYSE:RNF) produces nitrogen fertilizers for the agricultural industry. The limited partnership is a subsidiary of Rentech (AMEX:RTK). The stock is a recent initial public offering that began trading in November 2011 and has done extremely well, up 58% for the year. According to the SEC filings, RNF plans on paying an annual dividend of $2.34, equating to a yield of 9.1%. Due to the huge rally RNF has already experienced, the key is to let the stock come back to the low $20's before considering buying.

CVR Partners LP (NYSE:UAN) is in a very similar business as RNF and also pays a large dividend of 9.2%. The stock is a subsidiary of CVR Energy (NYSE:CVI). UAN began trading April 2011, and is up 14% in 2012 after hitting an all-time high earlier this month. Look for support at the $27 area, this could be the next buying opportunity.

The Bottom Line
The agricultural stocks have been strong over the last few years and hit a small speed bump in 2011. It appears they are back on track and could be, once again, overweighted in a portfolio. The one red flag is the current price appreciation of many of the stocks in the sector. I suggest waiting for a normal pullback of about 5 to 10% before pulling the trigger. This will allow for a more attractive reward-to-risk setup. (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.

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