“Farming for Profits: The #1 Stock of 2011”

By Travis Johnson, Stock Gumshoe, March 3, 2011

If you’re going to start your ad off with a line like this:

“One Stock is the Difference between a Good 2011 and a Rolling-in-the-Dough 2011 … AND YOU DON’T OWN IT!”

Well, you’re going to get the Gumshoe’s attention. I haven’t had a good “roll in the dough” since Scrooge McDuck invited me over to his Money Bin for some coin-swimming.

And even better, this teaser is all about one of the hottest “story” topics in investing right now: agriculture. So let’s find out what’s being teased, shall we?

The ad is from Robert Hsu, who used the “China’s demanding more meat” argument to pitch fertilizer stocks in his China Strategy a couple years ago, too … and this ad is more of the same basic spiel. Here’s an excerpt:

“3 Reasons to Buy This Fertilizer Giant With Both Hands

“I get it. The world’s fertilizer business is about as exciting as watching paint dry. But give me five more minutes, and I guarantee you’ll be calling your broker immediately.
Three reasons why:

“Inflation: Global inflation is here….

“The result is driving food, energy and other commodity prices to new highs. In fact, the UN Food and Agriculture Organization reported that its food price index popped 4.2% in December. And China’s food prices alone spiked 10.3% in January….

“… as China’s inflation soared over the past seven months, this fertilizer company’s shares surged 100%!

“Chinese Demand: China has more than 1.3 billion mouths to feed, and they want meat….

“The USDA reported that farmers paid a 14% increase for fertilizers in the first 11 months of 2010, while wholesale fertilizer prices surged even more rapidly.

“Takeover Target: The global commodity industry is consolidating. The fertilizer industry, in particular, is ripe for buyouts. And despite its status as the third-largest fertilizer company in the world, our pick is a prime takeover target.

“The reason why is simple: Potash already rejected a near-30% buyout offer from BHP Billiton, and Mosaic is already majority-owned by Cargill. That leaves our stock with a bull’s eye on its back.”

So … that’s probably enough for some of you intrepid Gumshoes out there to identify the stock, no? Third biggest fertilizer company, not Potash Corp or Mosaic … but wait, I have to keep the mystery alive for a few more moments so I can share a couple more clues that Hsu tosses out for us:

“The company just posted a 426% surge in net income, a 90% pop in profit and a 60% jump in revenue for the fourth quarter. And the company is expecting tight fertilizer supplies (potash, nitrogen and phosphate) in North America and nutrient crop price increases to jump-start prices in 2011.

“Yet, it’s trading at a 20% price/earnings discount to its top three competitors: 24X vs. 30X to 34X.”

And he even tosses in a few other opinions for us:

“JP Morgan just raised its 2011 estimates for this company and maintained its “overweight” rating.

“UBS recently reiterated its ‘Buy’ rating on the company and upped its price target.

“Fortune magazine revealed that this company is one of the ‘Top 10 Stocks for 2011,’ and is looking for these 10 stocks to boost their profits an average of 61% this year.”

And of course, like his colleague Louis Navellier, Hsu tells us that he simply can’t reveal this top secret name because too, too many people follow his words (OK, it’s his copywriters saying this — who are probably the same copywriters who write Navellier’s ads … but still). Hsu’s version of this is:

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“Unfortunately, I Can’t Tell You Any More

“I’ve already said too much.

“You see, though, I’m not one to brag, you must understand this: I am the foremost expert on investing in China….

“That’s why hedge funds, analysts, money management advisors and more than 10,000 individual investors follow my advice to a ‘T.’ And that means if I named this fertilizer company in this Special Alert, you would never be able to buy in at reasonable levels.
So, no company name… no stock symbol…”

Thankfully, your friendly neighborhood Stock Gumshoe has no such compunction, in part because the vast army of Gumshoe followers is perhaps just a wee bit bit smaller than Hsu’s herd of acolytes … and, of course, you’re also more than able to think for yourself and not follow anyone to a “T.”

The Thinkolator is in the shop, though, so I borrowed a new Cognitationizer from the neighbor … don’t worry, I think I can make it work fine. Just open the hopper there, toss in our clues … and yes, we have our quarry:

This is Agrium (AGU)

I know, big and boring, right? AGU has been the third largest fertilizer company in the world for a long time (or at least, third largest publicly traded one that’s close to being a “pure play”), and it has always, in my estimation, gotten short shrift compared to the big daddies Potash (POT) and Mosaic (MOS) — there are some good reasons for that, mostly because Agrium is a bit less of a “pure play” on potash and phosphate reserves than their cousins (they also run a very big retail and distribution network for fertilizer, seeds, crop protection, etc.). Fourth largest, by the way, is CF Industries (CF), which bought Terra Nitrogen not long ago after a drawn out competition with, coincidentally, Agrium. The market caps are $50 billion+ for POT, almost $40 billion for MOS (which is also controlled by the mega private company Cargill, though they’re trying to spin off their ownership … if not their board control), and down to about $15 billion for AGU and a bit under $10 billion for CF. All quite large.

And yes, the numbers match up perfectly — they did report 426% earnings growth in the last quarter, and Hsu understated the revenue growth slightly (it was 62.7%). I don’t know what the hell he’s talking about with 426% earnings growth and 90% profit growth — I always thought “profit,” “earnings” and “income” were pretty much synonymous when it comes to corporate reporting. Oh, wait, I figured it out — the 426% earnings growth was for the fourth quarter, year over year, and the 90% growth number (it’s actually a hair over that) must be for the full year 2010 over 2009.

Fortune did indeed choose Agrium as one of their top picks for 2011 back when they issued the list in December — although Mosaic made the list, too (and MOS may have a company-specific catalyst if the Cargill spinoff is taken well by investors, or gets them acquired by someone else, or into the S&P 500 as some have speculated — though I don’t know why MOS would make it over POT, I don’t think there are any “pure” fertilizer names in the S&P 500, agriculture is represented by folks like Deere and Monsanto).

So, certainly solid performance for Agrium — like almost every agriculture stock, they’ve been riding a big recovery from the crush of 2008 and early 2009, when fertilizer and soft commodity prices briefly collapsed, and, like their competitors, the stock has done very well since the recent bottom last Summer. The talk of global grains crises, and spectacularly rising prices for corn, wheat, etc. have certainly helped to boost demand for fertilizer — expectations continue to be that more acres will be planted globally this year, meaning more fertilizer will be needed, meaning prices will be higher. Stocks are reportedly below average for phosphate and potash in the US, too, so there isn’t a huge inventory to draw down as demand increases.

But, of course, investors know this — and to a large degree, the market anticipated it, which is why even good results from most of the ag names over the last month or so didn’t move the stocks much higher … and expectations are very high for this year, with several of these names expected to almost double earnings yet again (AGU’s trailing PE is actually slightly lower now than when Hsu’s copywriter teased it out, it’s right around 21, and the the forward PE, with earnings expected to go from last year’s $4.52 to well over $7, is right around 12).

Personally, I’d probably actually give the nod to AGU over MOS, CF and POT, but largely because of the more stable performance AGU can provide thanks to the fact that more than half of their revenue comes from the retail stores and the retail and wholesale distribution business. If there’s a big pop in potash prices, AGU won’t move quite as quickly as MOS and POT — but the hope is that perhaps they’ll be a bit less volatile. There are also plenty of smaller names in this space, ranging from the high-yield partnership Terra Nitrogen (TNH) to Intrepid Potash (IPI), survivor of the “potash junior” boomlet of 2007-2008.

And although I own plenty of agriculture-themed investments, I don’t own any of these — and it’s your money, anyway, so why would you care what I think? What do you think? Who will benefit from the increasing demand for fertilizer as we feed a hungry world? Or have all of these stocks — which are boom and bust prone despite their sometimes large size — just gone up too fast in recent months? Let us know with a comment below.

We also want to know, naturally, whether you think Robert Hsu is the “foremost expert on investing in China” — if you’ve subscribed to his China Strategy, please click here to review it for us and share your opinion with your fellow investors. Thanks!



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