Agriculture stocks are positioned to be the gift that keeps on giving, an investment category swept aloft for years and years on positive trends.
At least, that's the thinking about the sector at Raymond James Ltd., a firm that believes the possibility of profits from agriculture is such a compelling story that it has issued one of the biggest investment notes on a single topic ever compiled in Canada, a 185-page report outlining why farm-related securities are the place to be for the long haul.
The advisory firm's analysts say agriculture is in the midst of a bull run that is being driven by a host of positive factors, including a surging global population, crop problems due to extreme weather, growing water scarcity and the conversion of corn and other staples into fuel. The trends are unlikely to reverse any time soon and Raymond James believes investors should take notice.
Agriculture also has believers at Brockhouse Cooper, the Montreal-based boutique institutional brokerage firm. It issued a call on Tuesday to buy fertilizer stocks, arguing that prices have come down to a favourable point because of the correction in commodity markets.
"Agriculture is, in our view, a secular theme that will continue to play out over the next several years," Brockhouse says.
If the firms are right, securities with exposure to agriculture could become a highly sought after investment class, much like precious metals in the 1970s or dot-com companies in the 1990s. Those moves lasted so long they allowed those who got in early to make superlative gains, at least until it became an overcrowded trade.
Up until now, most of the interest in things agricultural in Canada has focused on Potash Corp. and other big-capitalization fertilizer producers. There are also a smattering of investments offering exposure to farmland, such as Agcapita Farmland Investment Partnership, and land managed by Bonnefield Financial. Several exchange-traded funds (ETFs) have an agriculture focus, including the Claymore Global Agriculture Fund and the Powershares DB Agriculture Fund .
Raymond James reviewed the handful of smaller Canadian firms with exposure to agriculture and selected as "top picks" a trio of very different plays: pulse crop distributor Alliance Grain Traders , farm implement seller Cervus Equipment Corp. and sweetener maker GLG Life Tech Corp.
It says the three have excellent prospects because they have healthy balance sheets, strong growth possibilities, proven managements and stock valuations that give investors a margin of safety in case something goes wrong.
The firm's analysts also think that three other companies will be able to outperform the market: corn starch producer Asia Bio-Chem Group , oilseeds processor Bioexx Specialty Proteins Ltd. and tractor distributor Rocky Mountain Dealerships Inc.
Among the companies, Asia Bio-Chem has the distinction of having one of the lowest price earnings multiples on the TSX, at 4.6 times Raymond James' estimate for this year and only 3.1 times next year's forecast.
Raymond James believes Asia Bio-Chem is being penalized because of its small size and the limited liquidity in its shares. The broker believes this investor reaction is overdone.
As always with any investment thesis that seems too good to be true, it's worthwhile considering what might go wrong with agricultural stocks.
One caveat is that there have already been huge increases in the prices of many crops, including corn, wheat and soybeans. Such runups are invariably followed by bumper harvests that depress prices and undercut agriculture-related firms.
"Large price spikes driven by production shortfalls are, in most cases, followed by volume recoveries and commensurate price easing, raising red flags in light of recent price action," Raymond James cautioned.
Another worry is that that there have been huge inflows of capital into agriculture investments, reflected by the increased trading in agricultural commodities and the large size of agribusiness ETFs.
Raymond James says the safest course is for investors to be mindful of the speculative mood, and take positions in companies, such as its top picks, that offer a margin of safety.