Reaping Returns In Agriculture On July 10 (FDP)

It wasn't long ago that everyone was pouring into agricultural stocks to take cover from the broad market selloff that happened earlier in the year. With the price of oil ever increasing, demand for ethanol had increased; and with growing demand for food coming from India and China, investing in agricultural stocks seemed to be a no brainer.

Listening to the old investing axiom 'buy low, and sell high," investors that still have faith in this sector should be excited at the opportunity to buy these companies at a bit of a discount after the strong run-up they have seen. P/E ratios have come down significantly, allowing investors to purchase the future earnings of these companies at a better price than back in the second quarter of the year. But is this just a correction, or the end of speculation? Lets take a closer look at a couple of the big decliners this past month, and see if we can find some opportunity going forward.

Company One Month Loss* Market Capitalization

Del Monte(NYSE:FDP) 22.2% $1.5 billion
Bunge(NYSE:BG) 17.5% $12.2 billion
Tejon Ranch(NYSE:TRC) 14.5% $554.3 million
Monsanto(NYSE:MON) 14.3% $66.0 billion
Syngenta AD(NYSE:SYT) 10.5% $27.5 billion

Data as of market close July 9, 2008

What's In A Bubble?
A bubble occurs when there is a speculative run up in a sector, or market's prices. "Speculative", in this case, means that the rise was greater than what was warranted by the fundamentals. Bubbles are always followed by a drastic drop, and so it is imperative that we know if this is the start of the selloff, or just a correction - a cool-down period if you will - before taking off again.

I don't think that anyone can argue that food demand has increased over the past few years. As China and India join the "industrialized nations club," the growing middle class is putting more and more pressure on the markets. Limited amounts of land, seed, and fertilizer, have pushed prices up in this heated sector. This doesn't sound too speculative yet, does it? When we look one of the other causes of the sector's boom, though, the answer isn't as cut and dry. If agriculture stocks are piggybacking on the rise in oil prices (due to an increase in demand for biofuels), and the oil run up is speculative, is some of the agricultural run-up speculative as well?

The jury is definely still out on this one. It seems the market is, and will always be, torn between whether current oil prices are based on increased demand, or market manipulation and speculation. We may never no the answer to this question until it is too late, but what we can do is look at the companies individually, and find one that should be able to do well even if oil does come back from its highs.

The Fruit Is Fresh
Fresh Del Monte (NYSE: FDP), produces, transports, sources, and distributes fresh fruit and vegetables globally. Last I checked, we weren't running cars on orange slices, so it's difficult to argue that Del Monte has been boosted by biofuel demand.

Del Monte definely became more affordable over the past month, with a P/E ratio of 7, which is a bit lower than the industry average of 10, and much lower than agricultural heavy weights such as Monsanto with a P/E of 34. Finally, Fresh Del Monte is in good financial shape. It's current assets more than double its current liabilities. Yesterday's closing price of $22.86 seems a steal when you consider that Del Monte has shareholder equity of $1.425 billion, or $22.49 per share (calculated from 63.35 million shares outstanding) (To learn more, check out Reading The Balance Sheet.)

Fresh Del Monte has three things going for it: It's not reliant on demand for biofuels; it's a good value play at current prices, and it has great fundamentals. As someone that does not think that the run up in agriculture stocks was because of a speculative bubble, I am looking at Fresh Del Monte today, as a good entry point.