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Heed Grantham's warning about resource shortages Add to ...

One key to good investing is knowing who to listen to. Myriad pundits appear on television or in print, but, sadly, many who attract attention are simply those who speak loudly or boldly – not those who actually have good track records.

So, when an investor with a strong track record speaks up, I listen. And one such investor is Jeremy Grantham, the U.K.-born head of Boston-based investment management firm GMO. Mr. Grantham was one of the few to warn of both the Internet bubble in the late 1990s and the U.S. credit bubble that burst in 2008. Now, he’s issuing another warning, one more long-term in nature, and it has to do with natural resources.

In his latest quarterly letter, Mr. Grantham says that unless we change our ways, we’re headed for major shortages of several resources, with the prospect of a complete depletion of potash and phosphates stocks – key in farming – high on the list. Also posing a problem: metals.

“Running out completely of potassium [potash]and phosphorus [phosphates]and eroding our soils are the real long-term problems we face,” Mr. Grantham says. “Their total or nearly total depletion would make it impossible to feed the 10 billion people expected 50 years from now.”

As for metals, he says, shortages will cause “severe problems,” but the world will adjust and deal with them. But, he adds, “the pressure from shortages and higher prices will slowly increase forever.”

Mr. Grantham says we have the ability to address these problems. The question is whether we have the willpower to look past the short term and make decisions based on the long term – something a capitalist system doesn’t do very well.

It stands to reason that companies in these areas will find demand and prices rising substantially as supplies dwindle. With that in mind, I thought it would be interesting to see which natural resource stocksare getting high marks from my Guru Strategies models, each of which is based on the approach of a different investing great.

Potash Corporation of Saskatchewan Inc.: Canada is the world leader in potash production and reserves, and Potash Corp. is responsible for about 20 per cent of global potash capacity. It is the world’s largest fertilizer company, also producing phosphates and nitrogen.

Potash Corp. ($46.3-billion market cap) gets strong interest from my Peter Lynch-inspired model. It considers the firm a “fast-grower” – Mr. Lynch’s favourite type of investment – because of its 27.1-per-cent long-term earnings-per-share growth rate. .

Mr. Lynch famously used the so-called PEG ratio to find growth stocks selling on the cheap. The PEG divides a company’s price-to-earnings ratio by its growth rate. With its 24.2 P/E and that 27.1-per-cent growth rate, Potash Corp. has a PEG of 0.89, which comes in under this model’s 1.0 upper limit, a good sign.

Canfor Pulp Products: While Mr. Grantham didn’t mention timber in his recent letter, he’s discussed it several times in recent years, saying it offers one of the most fertile grounds for investors.

This firm holds a 49.8-per-cent interest in the Canfor Pulp Limited Partnership, a pulp and paper products producer that operates three mills in Prince George, B.C. It is the largest producer of northern bleached softwood kraft pulp in North America and the third-largest in the world, and the leading producer of fully bleached, high performance kraft paper.

Canfor ($573.2-million market cap) gets strong interest from my Joel Greenblatt-based model. It likes the firm’s 16.4-per-cent earnings yield and impressive 440.9-per-cent return on capital. Overall, it sees Canfor as the second-most-attractive stock in the Canadian market right now.

GT Advanced Technologies Inc.: One alternative fuel Mr. Grantham speaks highly of is solar power. And this firm, located just a few hours south of the Canadian border in Merrimack, N.H., makes polysilicon production technology, and sapphire and silicon crystalline growth systems for the solar industry. Its products are also used in LED devices and other specialty markets.

GT Advanced ($1.5-billion market cap) gets strong interest from my Greenblatt-based model. The approach likes its 18.3-per-cent earnings yield and 57.4-per-cent return on capital, and ranks it as the 21st-best stock in the Canadian market.

Inmet Mining Corp.: Based in Toronto, Inmet produces copper and zinc, with operations in Turkey, Finland and Spain. It also has a development project in Panama.

Inmet gets strong interest from the model I base on the writings of Benjamin Graham, the man known as the father of value investing. This stringent approach requires that a firm have a current ratio (current assets/ current liabilities) of at least two, and more net current assets than long-term debt. Inmet delivers on both fronts, with an impressive current ratio of 4.44, and just $17-million in long-term debt versus $535-million in net current assets. It’s also selling at a good price: Its P/E (using three-year average earnings, which Mr. Graham did) is 12.4, and its price/book ratio is 1.49.

Disclosure: I’m long GTAT.

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