Indeed, the drop in the dollar's value has investors and speculators seeking physical commodities to park their funds in. This has caused the prices to expand in the grains sector, and when next year rolls around, you can expect that seed manufacturers will have priced next year's crop accordingly. So while the trading pits and the farmers are all banking money now, the next round of inflation is already being calculated into next year's margins.
And we can use those inflationary expectations to grow some profits of our own by investing in Monsanto Co. (NYSE: MON) - one of the world's largest seed producers.
Think of it as a "picks-and-shovels" play to capitalize on all of the farmers rushing to cash in on surging commodities prices.
Monsanto has earned $1.85 per share in the trailing 12-month period. It paid out $1.22 per share in dividends during that time. The company is exposed to the current soft commodity bull market, via clients flush with cash from historically large crop yields and high demand. These could be some of the best days a corn farmer has ever experienced.
So, why is the provider of the bulk seeds that have been planted been hurting? Its not the short side of the equation. I checked, and the company has almost no shares short. So, its not the black hat funds doing the damage to the stock price.
This caused me to dig even deeper, as I couldn't put a finger on why the stock was under performing its own index by a country mile.
The explosion in crop prices has been in the core area of Monsanto's business model, yet so far the market has ignored the stock price of the company. In fact, it's better to say that currently the market is discounting any positive effect high crop prices could have for Monsanto.
The stock is down 34% year to date, while the Standard & Poor's 500 Index (of which Monsanto is a member) is up more than 11%. The stock currently offers a forward-looking yield of 2.2%, or about what you'd get for holding 10-year U.S. Treasury. As a result, Monsanto has seen its price/earnings (P/E) ratio compress during the last year.
This has happened while the company is still growing some of its internal margins, even as others have suffered. These are signs of a company out of market favor, yet still highly profitable and undamaged by the sector in which it's operating.
So let's take a quick view of the lay of the land for Monsanto. The company is:
- Growing margins in a high-demand commodity.
- Paying a stable cash dividend of more than 2% per year to investors.
- Out of favor with Wall Street, with its stock currently down 34% so far this year.
- Poised for growing demand in the corn sector.
- Has a stock that's trading at a "compressed" P/E ratio, as compared to its last five years.
This makes Monsanto a long-term "Buy" in our book.
If you're interested in a leveraged investment in Monsanto, you should look at the Jan 2012 LEAP calls with a strike price of about $60.
(**) Special Note of Disclosure: Jack Barnes holds no interest in Monsanto.
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