If some agricultural equities look a little exhausted these days - especially as underlying commodities prices turn south across the board - that doesn't mean that investment prospects in the sector have dried up, at least according to one hedge-fund portfolio manager focused on the farm business.
"We find opportunities that are not mainstream," says Ejnar Knudsen, who has run Passport Capital's agricultural-focused fund since its inception in March 2009.
Knudsen is a long-term bull on ag for reasons shared by many other investors: global population growth, and the rising middle classes in China, India and other emerging economies, which will put pressure, they say, on food supplies.
Still, Knudsen knows that danger lurks when it comes to the more obvious agricultural stocks - such as Deere & Co. , Potash or Archer Daniels Midland .
"If you're in some of the more popular names, you either have to be much more tactical, or you have to be really long term in order to handle these downdrafts," Knudsen says. "If the world catches flu, some of these popular ag names will also catch flu."
That's why Knudsen looks for food and agriculture stocks "that have a margin of safety and don't have a lot of hot money poured into them." There are companies out there trading near book value, he says, or at multiples (six times EBIDTA, say), that offer "attractive opportunities."
"You could have the world reset at lower levels, and these companies will still do well," says Knudsen.
Here are four of Knudsen's overlooked agrarian favorites:
Chiquita Brands , the world's most famous banana grower, emerged from bankruptcy years ago, yet the company still has little in the way of Wall Street analyst coverage. The stock, therefore, flies under the radar, escaping the attention of investors, says Knudsen, whose fund owned about 885,000 shares of Chiquita as of March 31, according to Passport's latest quarterly filing.
He points to the stock's cheapness (a forward price-to-earnings multiple of 7.22, based on 2012 estimates) and to the notion that the banana industry may be poised for a rebound after a difficult period. With banana quotas in Europe lifted after 15 years, and with tight supplies in South America, the supply-demand balance looks supportive of banana prices, he says.
Chicken processor Tyson Foods and its peers have had a hard time with environmentalists, food activists and investors.
"Meat companies overall are out of favor," Knudsen says. "They're trading at close to book."
For investors, he says, the worry has been that chicken processors like Tyson would struggle to pass along higher grain prices to their customers. Knudsen believes it's only a matter of time. "The question is, will it be three months or nine," he says. Passport Capital owned about 413,000 class A common shares of Tyson as of March 31.
Despite widespread complaints of oversupply in the U.S. chicken market, Knudsen argues that a record shortage of protein overall has developed, saying that there's less meat available per person than at any point in 50 years.
Brazilian sugarcane processor and ethanol producer Cosan , the prize of billionaire Rubens Ometto Silveira Mello, is another Knudsen favourite, though it's a bit pricier than the others. It has a forward P/E of about 12.2.
Still, says Knudsen, the company's stock has been trading "at a substantial value to the current sugar price." If the market is pricing the company's stock at 15-cent sugar, for example, while sugar itself trades at 22 cents per pound, Knudsen can still make money on the appreciation of the equity even if sugar prices remain stagnant at these levels.
Of course, it's not always that simple. Ag companies may have hedges on, for instance. "You may have years when earnings don't show up. But, ultimately, that works through," Knudsen says.
Knudsen's Passport held 463,600 shares of Cosan as of March 31, up 73,000 shares from the previous quarter.
Another South American sugar grower and refiner, Adecoagro , just sold equity in the U.S. for the first time in January, backed by George Soros, whose fund owns about a third of the company. The stock became a key holding of Knudsen's Passport as well; the fund bought nearly 640,000 AGRO shares during the first quarter.
The company, however, is more diverse than Cosan. About half Adecoagro's balance sheet is made up of sugar plantations; the other half is corn and other cropland in Argentina and Uruguay, says Knudsen. (The company also grows coffee, soybeans and rice, and operates dairy farms.) Recently trading just above its offer price of $11, the stock is cheap, Knudsen says. The market, he says, is valuing the company at less than the appraised value of its roughly 500,000 acres of real estate.
Join us for a live discussion Wednesday, May 25 at 12 noon ET with Steve Hansen, analyst with Raymond James Ltd.
Mr. Hansen was ranked
Readers using mobile phones should read the discussion by following this link.