It's the best of times and the worst of times for U.S. farmers.
Red-hot economies such as China and India are hungry for U.S. farm exports.
The bad news is the U.S. may slide into a recession that sideswipes the world economy -- slashing food prices and the appetite that Chinese housewives have for Kansas wheat and Washington apples.
Another dilemma is that input prices -- what farmers pay for seeds, fertilizer and other supplies -- probably won't fall as rapidly as the food prices that all growers depend on to make a buck. So farmers face the double-edged sword of falling prices and inflated costs.
"The thing that concerns me most is our ever-rising input costs," said Tim Siefert, a farmer who owns 200 acres of farmland and leases another 200 acres in Auburn, Ill. He says the cost increases for fertilizer, seed, chemicals and fuel far exceed anything he's seen in the past.
Add the impact of climate change, new technology and farming methods and you have one of the biggest farm management challenges since the Dust Bowl days of the 1930s.
How are U.S. farmers coping? They're tapping a mix of new computer technology, tilling methods, chemicals, genetic engineering and consulting services. Their ability to mobilize these tools will help decide if they get traction in a competitive global economy where Peruvian onions are sold alongside New Jersey tomatoes in U.S. supermarkets.
Tech Clears Way
Doug Mosebar, president of the California Farm Bureau Federation, can't say enough about how new technology is transforming the way farmers manage their acreage.
In many cases, the gate to new technology leads to outer space.
Farm equipment makers like Deere & Co. (NYSE:DE - News), Japan's Kubota (NYSE:KUB - News) and others are placing satellite-based global positioning systems onto tractors and harvesters.
A Deere tractor with a GPS-equipped Auto-Trac steering system, for example, moves so precisely through a field that it optimizes tilling, seeding and other activities, while saving on fuel, seed, fertilizer and time.
Aerial imaging and other data gathered from computers mounted on farm equipment also can analyze nutrients, moisture and yield in every square foot of field under cultivation. This tells farmers how much fertilizer, seed and water should be used to cut waste and ramp up farm profits.
While some farmers have embraced computer tech in the field and office, others still fly by the seat of their pants.
"You can use computers and spreadsheets. Some do it the old- fashioned way with calculators. The main thing is to figure out what costs will be," said Jim Zimmer, Monsanto's (NYSE:MON - News) vice president of U.S. branded business.
But computer-based farming clearly has the edge these days. The USDA says the number of farmers with high-speed Internet access doubled in 2007, to 27%.
In 2007, 78% of medium to large farms -- those with sales of $250,000 or more -- owned or leased a computer. About 66% used it to help them manage their farm business.
Fortunately, many farmers have money to pay for this new tech. "Crop prices have been very good the last few years -- mostly because we've had a real change in the (way farms are organized)," said University of Missouri agronomist Nicholas Kalaitzandonakes.
The U.S. Department of Agriculture says the total value of all U.S. farm exports soared 67% to $81.9 billion in 2007 from $49.1 billion. in 1999.
U.S. farmers also have benefited from swelling demand for grain products like corn to make ethanol alternative fuels.
Consultants Help
On the human side, consultants are filling in the cracks for farmers where computers can't.
Siefert relies on consultants to help him decide when to sell his crops. "Timing is extremely important," he said, alluding to fast-changing commodities prices that spell success or doom for those who work the land. Consultants advise farmers on things from when to sell their crops to the best crop to plant for their soil type.
Monsanto's Zimmer says the biggest managing challenge that farmers face is deciding which crops to plant.
"Commodity prices have gone up," Zimmer said, "but so have input costs, fertilizer and fuels. Different crops take different fertilizers and fuel. Deciding which ones to plant is crucial."
Newer field techniques like no-till farming also help farmers get a leg up on efficiency.
No-till farming offers a way to grow crops from year to year without disturbing the soil through tillage. It first came into use in the early 1990s and is now popular.
Usually, the remains of the previous year's crop aren't plowed under and act as sort of a mulch that enriches the soil.
The farmer becomes more productive by not spending time plowing the field, time that can be spent planting, fertilizing or otherwise managing farms.
Research shows that continuous use of no-till methods controls soil erosion, raises crop yields and protects the environment.
War On Weeds
Floods, droughts and other forms of climate change are also stirring challenges for U.S. farmers.
Shifts in growing conditions are triggering weed growth in growing areas across the U.S. This is prompting development of new herbicides .
Monsanto's popular Roundup Ready herbicide gives farmers a new weapon in their war on weeds. It kills weeds without harming the crop. Monsanto also sells crop seeds that are resistant to the chemicals in Roundup. The one-two punch kills weeds while letting crops grow.
Drought conditions in some U.S. states also hurts corn and grain production for ethanol fuels. To meet the challenge, big agribusiness players like Monsanto, DuPont (NYSE:DD - News) and Novartis (NYSE:NVS - News) are using genetic engineering to produce drought-resistant crops.
Monsanto just finished its fifth season of field testing for drought-resistant corn that grows on far less water than regular strains.
Some industry officials say the long-term prospects for U.S. farming are good even if there's a dip in the economy this year that hits overseas markets.
"I think the next 15 to 25 years are going to be the most exciting in agriculture history," said Tom Warner, the vice president of Agrium (NYSE:AGU - News), a Calgary, Alberta-based agricultural products retailer. "There's an opportunity to help with the energy crisis as well as with increasing human consumption of food."
Deere's CEO Robert Lane says demand from China and India will play a big role in energizing U.S. farming.
"The growth of China and India means there are more than 2 billion people who will be able to buy food like they never did before," Lane told IBD in a recent interview.
Friday, February 29, 2008
Farm suppliers' profits bloom as commodity prices jump
WASHINGTON — Farmers aren't the only ones making money from the run-up in commodity prices. Companies that sell things to farmers, everything from fertilizer to seed to tractors, are reporting healthy profits, too.
Terra Industries (TRA), a major fertilizer supplier, reported that its fourth-quarter 2007 profit jumped by six times over the year before.
Deere (DE)— which makes tractors, harvesters and other farm equipment — reported record quarterly earnings. Agricultural equipment sales were up 33%.
The company could benefit further from a $168 billion economic stimulus package that the federal government recently approved. A provision will allow farmers to write off the value of their equipment sooner and let them keep a greater portion of last year's record income to spend on new machinery.
Monsanto (MON) has raised its 2008 earnings estimate by 8% because of strong seed and herbicide sales.
The list of agribusiness winners also includes names such as Dow Chemical (DOW) and DuPont (DD).
"Following a very strong 2007, 2008 is shaping up to be a spectacular year" for agricultural suppliers, Goldman Sachs analysts wrote this month in a report headlined: "Let the good times roll!" The analysts say the industry's "tremendous fundamentals" are unusual in the current economic slowdown.
Prices for corn, soybeans and other commodities have doubled in the past two years, and that means farmers can afford to pay more for seed and chemicals and buy new equipment. Crop insurers also make more money because premiums paid by farmers rise along with the price of the crop being covered.
Economists are forecasting commodity prices to remain well above traditional levels into the next decade.
The U.S. Department of Agriculture estimates that net cash farm income nationwide will hit a record $96.6 billion this year — up 10% from last year and 40% from 2006 — even with the higher prices being charged by companies such as Terra and Monsanto for fertilizer, seed and other supplies.
A farmer planting corn or soybeans this year would earn up to $500 or more per acre after the cost of seed, chemicals, insurance and fuel is deducted. That's up to five times what the crops returned in 2005, according to a Goldman Sachs analysis.
Farmers are willing to pay more for such supplies when their crop is more valuable, said Ron Litterer, president of the National Corn Growers Association.
Terra's ammonia fertilizer sold for an average of $333 a ton in 2007, up from $315 the year before.
A few farmers have tried to lock in their fertilizer prices for 2009, even though this year's crop isn't in the ground yet, said Joe Ewing, vice president of investor relations and human resources for Terra.
Citigroup estimates Terra's 2008 earnings will reach $3.71 per share and hit $4.11 in 2009, up from $2.45 for 2007.
DuPont's agriculture and nutrition business, which includes Pioneer Hi-Bred, is predicting double-digit earnings growth through 2012 because of the strong farm economy and DuPont's new seed and pesticide products.
Pioneer's worldwide seed sales were up 40% in the last quarter of 2007.
At Pioneer rival Monsanto, 2007 was "absolutely spectacular," Executive Vice President Brett Begemann said.
Agriculture is facing a long-term boom that could be derailed only by a depression, said Bill Doyle, chief executive of fertilizer giant PotashCorp (POT). The boom is being driven not by biofuel production so much as by growth in China, India and other countries, he said.
"It's a demographic switch that we've never seen before. We've always had lots of people, but we didn't have people with money in their pockets," he said.
Terra Industries (TRA), a major fertilizer supplier, reported that its fourth-quarter 2007 profit jumped by six times over the year before.
Deere (DE)— which makes tractors, harvesters and other farm equipment — reported record quarterly earnings. Agricultural equipment sales were up 33%.
The company could benefit further from a $168 billion economic stimulus package that the federal government recently approved. A provision will allow farmers to write off the value of their equipment sooner and let them keep a greater portion of last year's record income to spend on new machinery.
Monsanto (MON) has raised its 2008 earnings estimate by 8% because of strong seed and herbicide sales.
The list of agribusiness winners also includes names such as Dow Chemical (DOW) and DuPont (DD).
"Following a very strong 2007, 2008 is shaping up to be a spectacular year" for agricultural suppliers, Goldman Sachs analysts wrote this month in a report headlined: "Let the good times roll!" The analysts say the industry's "tremendous fundamentals" are unusual in the current economic slowdown.
Prices for corn, soybeans and other commodities have doubled in the past two years, and that means farmers can afford to pay more for seed and chemicals and buy new equipment. Crop insurers also make more money because premiums paid by farmers rise along with the price of the crop being covered.
Economists are forecasting commodity prices to remain well above traditional levels into the next decade.
The U.S. Department of Agriculture estimates that net cash farm income nationwide will hit a record $96.6 billion this year — up 10% from last year and 40% from 2006 — even with the higher prices being charged by companies such as Terra and Monsanto for fertilizer, seed and other supplies.
A farmer planting corn or soybeans this year would earn up to $500 or more per acre after the cost of seed, chemicals, insurance and fuel is deducted. That's up to five times what the crops returned in 2005, according to a Goldman Sachs analysis.
Farmers are willing to pay more for such supplies when their crop is more valuable, said Ron Litterer, president of the National Corn Growers Association.
Terra's ammonia fertilizer sold for an average of $333 a ton in 2007, up from $315 the year before.
A few farmers have tried to lock in their fertilizer prices for 2009, even though this year's crop isn't in the ground yet, said Joe Ewing, vice president of investor relations and human resources for Terra.
Citigroup estimates Terra's 2008 earnings will reach $3.71 per share and hit $4.11 in 2009, up from $2.45 for 2007.
DuPont's agriculture and nutrition business, which includes Pioneer Hi-Bred, is predicting double-digit earnings growth through 2012 because of the strong farm economy and DuPont's new seed and pesticide products.
Pioneer's worldwide seed sales were up 40% in the last quarter of 2007.
At Pioneer rival Monsanto, 2007 was "absolutely spectacular," Executive Vice President Brett Begemann said.
Agriculture is facing a long-term boom that could be derailed only by a depression, said Bill Doyle, chief executive of fertilizer giant PotashCorp (POT). The boom is being driven not by biofuel production so much as by growth in China, India and other countries, he said.
"It's a demographic switch that we've never seen before. We've always had lots of people, but we didn't have people with money in their pockets," he said.
Agriculture Sector Looks Good in Genes
On the inside pages of today’s Wall Street Journal is a half-page advertisement from BASF touting its ability to get “48 miles per kennel.” The claim is a clever bit of hyperbole, but it does hint at a promising future for the entire agricultural sector -- an area which, as fellow fool Matt Koppenheffer noted earlier this year, is already doing quite well.
A new tool: the supercomputer For centuries, the agricultural industry has been adept at applying the latest advances in technology to improve both yield and productivity. There is no reason to believe that this trend will stop anytime soon, and one unlikely hero in this unfolding technological revolution will be the humble supercomputer.
Earlier this week, researchers at Sandia and Oak Ridge National Laboratories announced that they were developing an exascale computer. For those of you counting at home, an exascale computer will be 1,000 times faster than today’s petaflop computers -- which, as I explained in this piece, are already wickedly powerful.
Now, these supercomputers won’t be tilling the fields or harvesting crops anytime soon, but they will allow farmers to reap more from every kennel of corn and acre of land. This is because supercomputers are the engines fueling the new discoveries being made in the rapidly maturing field of genomics.
This past week brought two noteworthy breakthroughs. First, a team of scientists announced that they had completed a working draft of the corn genome. Among other things, this development is expected to lead to better crop varieties that can meet society’s growing demand for food, livestock, feed, and fuel.
Last week, I wrote about how agricultural scientists at DuPont (NYSE: DD) had identified a key gene that boosts the yield of oil and oleic acid and explained how this could be a windfall to a company like Archer Daniels Midland (NYSE: ADM).
With the corn genome now unraveled, researchers will be able to take this advance many steps farther, including making corn both more nutritious and more efficient for ethanol production -- although not likely in the same cob. In addition to being a boon for large ethanol producers such as The Andersons (Nasdaq: ANDE) and Poet Energy, this could also alleviate some of the tension over the “food vs. fuel” debate by allowing farmers to squeeze more ethanol from each bushel of corn.
Who needs the rain? A second area in which genomics promises to yield some important breakthroughs is in the creation of drought-resistant crops. In a paper published in Nature this week, biologists at the University of California, San Diego, outlined how they have isolated a gene responsible for opening and closing the stomatal pores, which regulate water loss from plants.
This might not sound like that big of a deal, until one considers that plants under drought stress lose 95% of their water through such pores.
If successfully developed at a commercial scale by a company like Monsanto (NYSE: MON) -- and this is still a big “if” at this time -- the advance could open up vast regions of the planet to productive farming. And because many of these crops will still need to rely on fertilizers and other chemicals to achieve maximum output, this could be a boon to companies like The Mosaic Company (NYSE: MOS) and Syngenta (NYSE: SYT), which supply those materials.
Foolish bottom line As significant as these advances are, I would strongly advise Foolish readers to keep an eye on the work of geneticist Craig Venter. At a presentation at the prestigious Technology, Entertainment and Design (TED) conference this week, Venter disclosed his potentially world-changing “fourth-generation fuel,” which (as you may have guessed) is being fueled by advances in genomics.
As Venter noted, he has 20 million genes which he can genetically reengineer to “eat” agricultural feedstocks and “excrete” pure fuel. If he is successful, agriculture could not only feed the world, it could fuel it.
Advances in genomics are going to impact a great many industries, including health care and pharmaceuticals. But for my money, if you’re looking for an industry that might look really good in “genes,” you should consider the agricultural sector.
A new tool: the supercomputer For centuries, the agricultural industry has been adept at applying the latest advances in technology to improve both yield and productivity. There is no reason to believe that this trend will stop anytime soon, and one unlikely hero in this unfolding technological revolution will be the humble supercomputer.
Earlier this week, researchers at Sandia and Oak Ridge National Laboratories announced that they were developing an exascale computer. For those of you counting at home, an exascale computer will be 1,000 times faster than today’s petaflop computers -- which, as I explained in this piece, are already wickedly powerful.
Now, these supercomputers won’t be tilling the fields or harvesting crops anytime soon, but they will allow farmers to reap more from every kennel of corn and acre of land. This is because supercomputers are the engines fueling the new discoveries being made in the rapidly maturing field of genomics.
This past week brought two noteworthy breakthroughs. First, a team of scientists announced that they had completed a working draft of the corn genome. Among other things, this development is expected to lead to better crop varieties that can meet society’s growing demand for food, livestock, feed, and fuel.
Last week, I wrote about how agricultural scientists at DuPont (NYSE: DD) had identified a key gene that boosts the yield of oil and oleic acid and explained how this could be a windfall to a company like Archer Daniels Midland (NYSE: ADM).
With the corn genome now unraveled, researchers will be able to take this advance many steps farther, including making corn both more nutritious and more efficient for ethanol production -- although not likely in the same cob. In addition to being a boon for large ethanol producers such as The Andersons (Nasdaq: ANDE) and Poet Energy, this could also alleviate some of the tension over the “food vs. fuel” debate by allowing farmers to squeeze more ethanol from each bushel of corn.
Who needs the rain? A second area in which genomics promises to yield some important breakthroughs is in the creation of drought-resistant crops. In a paper published in Nature this week, biologists at the University of California, San Diego, outlined how they have isolated a gene responsible for opening and closing the stomatal pores, which regulate water loss from plants.
This might not sound like that big of a deal, until one considers that plants under drought stress lose 95% of their water through such pores.
If successfully developed at a commercial scale by a company like Monsanto (NYSE: MON) -- and this is still a big “if” at this time -- the advance could open up vast regions of the planet to productive farming. And because many of these crops will still need to rely on fertilizers and other chemicals to achieve maximum output, this could be a boon to companies like The Mosaic Company (NYSE: MOS) and Syngenta (NYSE: SYT), which supply those materials.
Foolish bottom line As significant as these advances are, I would strongly advise Foolish readers to keep an eye on the work of geneticist Craig Venter. At a presentation at the prestigious Technology, Entertainment and Design (TED) conference this week, Venter disclosed his potentially world-changing “fourth-generation fuel,” which (as you may have guessed) is being fueled by advances in genomics.
As Venter noted, he has 20 million genes which he can genetically reengineer to “eat” agricultural feedstocks and “excrete” pure fuel. If he is successful, agriculture could not only feed the world, it could fuel it.
Advances in genomics are going to impact a great many industries, including health care and pharmaceuticals. But for my money, if you’re looking for an industry that might look really good in “genes,” you should consider the agricultural sector.
Thursday, February 28, 2008
Stock Star Rating Performance Update
As an investor, I have always valued candor very highly when assessing both CEOs and portfolio managers. So, I will be as candid as possible in reviewing the overall performance of our stock picks in 2007: We had a bad year. Our 5-star calls underperformed just about any relevant benchmark, and they also posted poor absolute returns.
What went wrong? Broadly speaking, two themes hurt us. First, we underestimated the amount of bad lending behavior during the housing bubble, which had repercussions across our coverage universe--from homebuilders to mortgage lenders to bond guarantors and beyond. Second, the spillover effects of a weak real-estate market on consumer spending were much greater than we anticipated, causing us to re-evaluate the prospects for many retailers and restaurants.
Click here to see the images associated with this article:http://news.morningstar.com/articlenet/article.aspx?id=230081
Our poor 2007 returns drag down our trailing numbers, as you can see in the table below. Although we are still ahead of the S&P 500 over the long term, our lead has been cut by quite a bit.
Click here to see the images associated with this article:http://news.morningstar.com/articlenet/article.aspx?id=230081
Let's start with housing.
With the benefit of 20/20 hindsight, I think it's clear that much of the unsustainable demand and uneconomic lending that occurred during the housing boom can be traced back to the widening gulf between lenders and borrowers.
Way back in the days of yore, a real estate lender assessed the value of a piece of property as collateral, made a judgment about the borrower's ability to repay the loan, and then held that loan for a lengthy period of time. If the property's value was misestimated, or the borrower turned out to be a poor credit risk, the lender suffered the consequences. The advent of Fannie Mae (NYSE:FNM - News) and Freddie Mac (NYSE:FRE - News) made it easier for lenders to sell loans into the secondary market, but the standards imposed by those two institutions on the kinds of loans they would purchase maintained some degree of oversight on the market.
But as the demand for nonconforming loans--that is, those outside Fannie and Freddie's guidelines--increased, lenders were happy to step up to the plate, make the loans, and wash their hands of the loans' future performance by selling them to investors. This latter point is crucial, and a recent paper from the University of Chicago puts some analytical meat on a point that seems intuitively clear--when a lender has little economic stake in the future performance of a loan, he or she will have little incentive to make loans that are more likely to be repaid.
The bottom line is that poor lending and underwriting decisions were being made in many, many parts of the mortgage market, and we did not anticipate the consequences of those decisions. These decisions created unsustainable levels of demand for real estate, which made the downturn that much worse for homebuilders, and they created large losses in many financial institutions as loan performance worsened.
That's the general backdrop. On a more specific level, we entered 2007 with fairly downbeat forecasts for most of the financial services companies we cover, expecting that the benign credit environment of the previous few years would deteriorate substantially. In fact, the average price/fair value ratio for the financial services sector was 1.10 at the beginning of 2007, meaning that we thought the sector was about 10% overvalued, and only 4% of financial services companies were rated 5 stars.
However, we were expecting credit metrics to revert back to long-run historical averages, and it now looks like they'll shoot way past that level. We also underestimated just how much of the financial services world was tied to mortgages in one way or another, which meant that we did not anticipate the massive security write-downs that have plagued the largest banks and caused the bond insurers to implode.
Finally, as is often the case with levered companies that start experiencing liquidity troubles, the market can quickly shift from valuing a company as a going concern to valuing it as a collection of assets and liabilities that may be worthless. We were behind the curve in recognizing this change for some of our worst performers--at a certain point, market perception can become reality if it impairs a company's ability to raise capital.
Our poorly timed bullish calls on homebuilders reduced the performance of the Buy at 5, Sell at Fair Value portfolio by 3.8 percentage points in 2007, a figure that rises to 8 percentage points once you factor in the impact of our ratings on mortgage-related financial services firms. The portfolio would have been roughly flat absent these calls.
Consumer stocks also hurt our performance in 2007, though to a much lesser extent than housing and mortgage-related stocks. On a very big-picture level, consumer spending tends to follow employment, and the relatively strong job market throughout 2007 lulled us into a sense of false security regarding consumers' likely reaction to the declining real estate market, and so we rated many retailers and restaurants 5 stars as the sector rolled over in the second half of the year. The picture has turned decidedly worse over the past few months, and although we still think many consumer-related stocks are excellent bargains at the moment, we did reduce a number of our fair value estimates in early 2008. We turned bullish too early, generally speaking.
On the bright side, we had some excellent stock-specific calls that helped our performance. Monsanto (NYSE:MON - News) and Mastercard (NYSE:MA - News) continued to be big winners for us, both more than doubling during 2007. We still love both of these wide-moat businesses, but their shares are only fairly valued at the moment. Speaking of good businesses, our bullish stance on for-profit education stocks paid off nicely in 2007, with DeVry (NYSE:DV - News) and Apollo (NasdaqGS:APOL - News) each rising about 80%, and Strayer (NasdaqGS:STRA - News) popping more than 60%. Steel stocks also helped our performance, with Brazilian steelmaker Gerdau (NYSE:GGB - News) rising more than 70%, the newly merged ArcelorMittal (NYSE:MT - News) jumping almost 90%, and low-cost minimill operator Steel Dynamics (NasdaqGS:STLD - News) rising 60% in the second half of the year.
I'll end this performance review on a bullish note. While we clearly erred in our assessment of most housing-related stocks last year, we're working hard to not anchor on that experience--otherwise, we could easily become too conservative and miss the bottom whenever it does come. Moreover, it's important to remember that stocks do not become cheap when the headlines are good, and we try to add value for our clients by being willing to step into seemingly ugly situations. Last year, many of these contrarian calls hurt our performance, but we continue to believe that, over time, buying assets for 70 and 80 cents on the dollar is a rational route to solid investment returns.
At the moment, the median stock we cover is about 12% undervalued, while large-cap, high-quality companies look even cheaper, trading at 15%-20% discounts to our estimates of intrinsic value. In our opinion, this is a better time to be a net buyer of stocks than a net seller, especially because the cheapest assets--wide-moat mega-cap stocks--are also the ones best positioned to serve as the bedrock of a long-term portfolio.
What went wrong? Broadly speaking, two themes hurt us. First, we underestimated the amount of bad lending behavior during the housing bubble, which had repercussions across our coverage universe--from homebuilders to mortgage lenders to bond guarantors and beyond. Second, the spillover effects of a weak real-estate market on consumer spending were much greater than we anticipated, causing us to re-evaluate the prospects for many retailers and restaurants.
Click here to see the images associated with this article:http://news.morningstar.com/articlenet/article.aspx?id=230081
Our poor 2007 returns drag down our trailing numbers, as you can see in the table below. Although we are still ahead of the S&P 500 over the long term, our lead has been cut by quite a bit.
Click here to see the images associated with this article:http://news.morningstar.com/articlenet/article.aspx?id=230081
Let's start with housing.
With the benefit of 20/20 hindsight, I think it's clear that much of the unsustainable demand and uneconomic lending that occurred during the housing boom can be traced back to the widening gulf between lenders and borrowers.
Way back in the days of yore, a real estate lender assessed the value of a piece of property as collateral, made a judgment about the borrower's ability to repay the loan, and then held that loan for a lengthy period of time. If the property's value was misestimated, or the borrower turned out to be a poor credit risk, the lender suffered the consequences. The advent of Fannie Mae (NYSE:FNM - News) and Freddie Mac (NYSE:FRE - News) made it easier for lenders to sell loans into the secondary market, but the standards imposed by those two institutions on the kinds of loans they would purchase maintained some degree of oversight on the market.
But as the demand for nonconforming loans--that is, those outside Fannie and Freddie's guidelines--increased, lenders were happy to step up to the plate, make the loans, and wash their hands of the loans' future performance by selling them to investors. This latter point is crucial, and a recent paper from the University of Chicago puts some analytical meat on a point that seems intuitively clear--when a lender has little economic stake in the future performance of a loan, he or she will have little incentive to make loans that are more likely to be repaid.
The bottom line is that poor lending and underwriting decisions were being made in many, many parts of the mortgage market, and we did not anticipate the consequences of those decisions. These decisions created unsustainable levels of demand for real estate, which made the downturn that much worse for homebuilders, and they created large losses in many financial institutions as loan performance worsened.
That's the general backdrop. On a more specific level, we entered 2007 with fairly downbeat forecasts for most of the financial services companies we cover, expecting that the benign credit environment of the previous few years would deteriorate substantially. In fact, the average price/fair value ratio for the financial services sector was 1.10 at the beginning of 2007, meaning that we thought the sector was about 10% overvalued, and only 4% of financial services companies were rated 5 stars.
However, we were expecting credit metrics to revert back to long-run historical averages, and it now looks like they'll shoot way past that level. We also underestimated just how much of the financial services world was tied to mortgages in one way or another, which meant that we did not anticipate the massive security write-downs that have plagued the largest banks and caused the bond insurers to implode.
Finally, as is often the case with levered companies that start experiencing liquidity troubles, the market can quickly shift from valuing a company as a going concern to valuing it as a collection of assets and liabilities that may be worthless. We were behind the curve in recognizing this change for some of our worst performers--at a certain point, market perception can become reality if it impairs a company's ability to raise capital.
Our poorly timed bullish calls on homebuilders reduced the performance of the Buy at 5, Sell at Fair Value portfolio by 3.8 percentage points in 2007, a figure that rises to 8 percentage points once you factor in the impact of our ratings on mortgage-related financial services firms. The portfolio would have been roughly flat absent these calls.
Consumer stocks also hurt our performance in 2007, though to a much lesser extent than housing and mortgage-related stocks. On a very big-picture level, consumer spending tends to follow employment, and the relatively strong job market throughout 2007 lulled us into a sense of false security regarding consumers' likely reaction to the declining real estate market, and so we rated many retailers and restaurants 5 stars as the sector rolled over in the second half of the year. The picture has turned decidedly worse over the past few months, and although we still think many consumer-related stocks are excellent bargains at the moment, we did reduce a number of our fair value estimates in early 2008. We turned bullish too early, generally speaking.
On the bright side, we had some excellent stock-specific calls that helped our performance. Monsanto (NYSE:MON - News) and Mastercard (NYSE:MA - News) continued to be big winners for us, both more than doubling during 2007. We still love both of these wide-moat businesses, but their shares are only fairly valued at the moment. Speaking of good businesses, our bullish stance on for-profit education stocks paid off nicely in 2007, with DeVry (NYSE:DV - News) and Apollo (NasdaqGS:APOL - News) each rising about 80%, and Strayer (NasdaqGS:STRA - News) popping more than 60%. Steel stocks also helped our performance, with Brazilian steelmaker Gerdau (NYSE:GGB - News) rising more than 70%, the newly merged ArcelorMittal (NYSE:MT - News) jumping almost 90%, and low-cost minimill operator Steel Dynamics (NasdaqGS:STLD - News) rising 60% in the second half of the year.
I'll end this performance review on a bullish note. While we clearly erred in our assessment of most housing-related stocks last year, we're working hard to not anchor on that experience--otherwise, we could easily become too conservative and miss the bottom whenever it does come. Moreover, it's important to remember that stocks do not become cheap when the headlines are good, and we try to add value for our clients by being willing to step into seemingly ugly situations. Last year, many of these contrarian calls hurt our performance, but we continue to believe that, over time, buying assets for 70 and 80 cents on the dollar is a rational route to solid investment returns.
At the moment, the median stock we cover is about 12% undervalued, while large-cap, high-quality companies look even cheaper, trading at 15%-20% discounts to our estimates of intrinsic value. In our opinion, this is a better time to be a net buyer of stocks than a net seller, especially because the cheapest assets--wide-moat mega-cap stocks--are also the ones best positioned to serve as the bedrock of a long-term portfolio.
Terra Industries SVP Sells Shares
Terra Industries Senior Vice President Joseph D. Giesler Sells 5,000 Shares
NEW YORK (AP) -- A senior vice president of fertilizer producer Terra Industries Inc. sold 5,000 shares of common stock, according to a Securities and Exchange Commission filing Tuesday.
In a Form 4 filed with the SEC, Joseph D. Giesler reported selling the shares on Tuesday for $51.85 apiece. Giesler also surrendered 19,613 shares back to the company for $47.75 apiece on Friday.
Insiders can surrender shares as a way to cover either taxes or the cost of exercising options.
Insiders file Form 4s with the SEC to report transactions in their companies' shares. Open market purchases and sales must be reported within two business days of the transaction.
Terra Industries is based in Sioux City, Iowa
NEW YORK (AP) -- A senior vice president of fertilizer producer Terra Industries Inc. sold 5,000 shares of common stock, according to a Securities and Exchange Commission filing Tuesday.
In a Form 4 filed with the SEC, Joseph D. Giesler reported selling the shares on Tuesday for $51.85 apiece. Giesler also surrendered 19,613 shares back to the company for $47.75 apiece on Friday.
Insiders can surrender shares as a way to cover either taxes or the cost of exercising options.
Insiders file Form 4s with the SEC to report transactions in their companies' shares. Open market purchases and sales must be reported within two business days of the transaction.
Terra Industries is based in Sioux City, Iowa
Potash Widely Held Among Hedge Funds and Other Pro Investors
A confluence of global factors continues to keep shares of fertilizer producers near all-time highs. Worldwide demand, backed by everything from the subsidy-backed ethanol boom to booming economies in Asia, has pushed fertilizer prices higher as farmers are upping their yields in order to meet demand.
The recent run to $100 per barrel oil -- lofty oil prices keep demand for biofuels high -- has helped fertilizer companies, but concerns about a slowing global economy, which could reduce demand for oil and thus ease the demand for ethanol as well, have the potential to temper some of the enthusiasm for fertilizer stocks.
Nonetheless, industry leader Potash (NYSE: POT - News), a Canadian firm specializing in potash, a form of potassium carbonate, as well as nitrogen and phosphate, all of which have agricultural applications, is up about 11% year to date. Meanwhile, the industry's other giant, potash producer Mosaic (NYSE: MOS - News) has seen its shares gain 20% in 2008. Another producer, Agrium (NYSE: AGU - News), is awaiting approval for its $2.15 billion agreement to buy agricultural-products distributor UAP Holding (Nasdaq: UAPH - News).
Several institutional investors have had exposure to the fertilizer boom. Hedge fund Dawson Herman Capital Management, which "has traditionally invested in the growth sectors of the U.S. economy," according to its website, has substantial holdings in the sector. As of the end of 2007, its top-four U.S-listed equity holdings are fertilizer producers. During Q4, the firm trimmed its stakes in Terra Industries (NYSE: TRA - News), a firm that produces nitrogen and methanol products for agricultural and industrial markets, and CF Industries (NYSE: CF - News), which operates in two segments, nitrogen fertilizers and phosphate fertilizers. The firm also slightly increased its stakes in Potash and Mosaic. A list of the rest of Dawson's top U.S-listed equity holdings is available at tickerspy.com.
Potash proved to be the most popular fertilizer company among Pro investors in Q4. Among the 44 investment firms holding stakes in the company, the largest was a 20.1 million-share stake held by mutual fund giant Janus Capital Management. Meanwhile, Potash is also the favorite fertilizer stock among tickerspy members, though Terra Nitrogen (NYSE: TNH - News), an incredibly volatile master limited partnership (MLP) with a focus on nitrogen fertilizer products, and Compass Minerals (NYSE: CMP - News), a specialty fertilizer producer, are popular as well.
The recent run to $100 per barrel oil -- lofty oil prices keep demand for biofuels high -- has helped fertilizer companies, but concerns about a slowing global economy, which could reduce demand for oil and thus ease the demand for ethanol as well, have the potential to temper some of the enthusiasm for fertilizer stocks.
Nonetheless, industry leader Potash (NYSE: POT - News), a Canadian firm specializing in potash, a form of potassium carbonate, as well as nitrogen and phosphate, all of which have agricultural applications, is up about 11% year to date. Meanwhile, the industry's other giant, potash producer Mosaic (NYSE: MOS - News) has seen its shares gain 20% in 2008. Another producer, Agrium (NYSE: AGU - News), is awaiting approval for its $2.15 billion agreement to buy agricultural-products distributor UAP Holding (Nasdaq: UAPH - News).
Several institutional investors have had exposure to the fertilizer boom. Hedge fund Dawson Herman Capital Management, which "has traditionally invested in the growth sectors of the U.S. economy," according to its website, has substantial holdings in the sector. As of the end of 2007, its top-four U.S-listed equity holdings are fertilizer producers. During Q4, the firm trimmed its stakes in Terra Industries (NYSE: TRA - News), a firm that produces nitrogen and methanol products for agricultural and industrial markets, and CF Industries (NYSE: CF - News), which operates in two segments, nitrogen fertilizers and phosphate fertilizers. The firm also slightly increased its stakes in Potash and Mosaic. A list of the rest of Dawson's top U.S-listed equity holdings is available at tickerspy.com.
Potash proved to be the most popular fertilizer company among Pro investors in Q4. Among the 44 investment firms holding stakes in the company, the largest was a 20.1 million-share stake held by mutual fund giant Janus Capital Management. Meanwhile, Potash is also the favorite fertilizer stock among tickerspy members, though Terra Nitrogen (NYSE: TNH - News), an incredibly volatile master limited partnership (MLP) with a focus on nitrogen fertilizer products, and Compass Minerals (NYSE: CMP - News), a specialty fertilizer producer, are popular as well.
Wednesday, February 27, 2008
Feast or Famine?
Cramer likes to invoke the ghosts of leaders past – and, on occasion, top-40 rappers – to make a point. So when he declares “ethanol subsidies [are] crucifying mankind upon a cross of ethanol,” high-school-level history buffs probably recognize the William Jennings Bryan reference
Cramer’s scornful diatribes against ethanol are nothing new to Mad Money fans. They happen almost as often as the Lightning Round. But he’ll be the first to admit the resultant “federally mandated bull market” in agriculture has been a boon to his Fab Five: Mosaic , Potash, Agrium,Monsanto and Deere
Now, the sector’s getting another lift from sky-high food prices. Corn and soybeans have soared to record levels. Wheat prices during the trading day are maxing out. And the profits are going straight to the ag sector’s bottom line.
Now, the dark side of this expensive food, Cramer says, is that billions either don’t have it or can’t afford to buy it. So poor people from China to Brazil are going hungry as these crops are used for fuel or livestock feed. This means, at least to some extent, the Fab Five are getting filthy rich in the midst of a global famine.
What’s a loyal Homegamer to do? Join the Peace Corp.? Go vegan? (Here’s the definition just in case you’re in the same camp as Roger Clemens.)
Nope. Cramer recommends you buy the Fab Five. These stocks have returned anywhere from 93% to 222% since Cramer first mentioned them on the show. And because it’s still early in this sector’s multiyear cycle, Mosaic, Potash, Agrium, Monsanto and Deere should continue to outperform.
In fact, Cramer said he doubts they’ll stop until their combined market cap equals that of Exxon Mobil, $479.7 billion. The Fab Five are only at $210.6 billion, so “these stocks still have a way to go,” Cramer said.
If your conscience is still weighing on you after you cash in, you can always donate the profits to the United Nations World Food Program.
Cramer’s scornful diatribes against ethanol are nothing new to Mad Money fans. They happen almost as often as the Lightning Round. But he’ll be the first to admit the resultant “federally mandated bull market” in agriculture has been a boon to his Fab Five: Mosaic , Potash, Agrium,Monsanto and Deere
Now, the sector’s getting another lift from sky-high food prices. Corn and soybeans have soared to record levels. Wheat prices during the trading day are maxing out. And the profits are going straight to the ag sector’s bottom line.
Now, the dark side of this expensive food, Cramer says, is that billions either don’t have it or can’t afford to buy it. So poor people from China to Brazil are going hungry as these crops are used for fuel or livestock feed. This means, at least to some extent, the Fab Five are getting filthy rich in the midst of a global famine.
What’s a loyal Homegamer to do? Join the Peace Corp.? Go vegan? (Here’s the definition just in case you’re in the same camp as Roger Clemens.)
Nope. Cramer recommends you buy the Fab Five. These stocks have returned anywhere from 93% to 222% since Cramer first mentioned them on the show. And because it’s still early in this sector’s multiyear cycle, Mosaic, Potash, Agrium, Monsanto and Deere should continue to outperform.
In fact, Cramer said he doubts they’ll stop until their combined market cap equals that of Exxon Mobil, $479.7 billion. The Fab Five are only at $210.6 billion, so “these stocks still have a way to go,” Cramer said.
If your conscience is still weighing on you after you cash in, you can always donate the profits to the United Nations World Food Program.
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