Every cycle in the economy brings a different set of opportunities for investors. These are weighted as a balance between risk and potential reward. Depending on market conditions, the scale may tip to one side or the other. Today’s environment may pose a higher-than-desired risk for most investors, so boring names may be the best place.
With an overall lack of volatility, the agricultural sector could be one place for investors to start looking to tip the reward scale in their favor at the least risk. Within this industry, three specific stocks could lead to a turnaround in its current bottoming.
Stocks like Deere & Co. (NYSE: DE), Corteva Inc. (NYSE: CTVA), and Archer-Daniels-Midland Co. (NYSE: ADM) each have merit for a breakout watchlist. Before investors dig in, here’s the primary trend driving all three companies today.
2024: The Year of The Farmer
According to investor presentations from CF Industries Holdings Inc. (NYSE: CF), global stocks-to-use ratios have reached a cyclical bottom in the past few months.
Focused on grains and oilseeds, some of the main factors in animal feed and human consumption through vegetable cooking oils, the world supply needs to see a restock soon or risk continued food inflation.
Understanding that farming probably can’t occur without Deere’s tractors and other farming machinery, investors can see this stock as the first to get ‘paid’ in this industry value chain. CTVA’s seed and crop protection products must ensure optimal farm yields in this new production wave.
Last but not least, these commodities (once harvested) need to be stored and transported, where Archer-Daniels services step in to be the last to get ‘paid.’ The profit waterfall matters to investors since they all carry different opportunities and characteristics.
For Those in A Hurry, Deere Stock is Best
[content-module:CompanyOverview|NYSE:DE]Markets now pay a 5.2x price-to-book (P/B) ratio for Deere stock, above the farm machinery & equipment industry’s 2.6x valuation. There must be a good reason for markets to pay a 100% premium for Deere stock instead of its competitors.
One reason is the company’s outdated earnings per share (EPS) projections, with analysts expecting a 2.5% decline for the year. The contradiction is Deere’s $433.3 price target, which shoots for up to 10% upside from where the stock trades today.
While reporting some disappointing figures in their first quarter 2024 presentation, there is one golden nugget for investors to remember. Deere’s turf and utility equipment sales rose by double-digits, with construction and forestry also following the trend.
With the ISM services PMI index showing more than three months of expansion for the agriculture and forestry industry, Deere’s business could be set up to beat analyst and management expectations this year.
By far the biggest name in the list, at a $110 billion market capitalization, Deere’s low beta can give investors a less bumpy way to ride the industry breakout.
Corteva Can Fill Your Need for Thrill
[content-module:CompanyOverview|NYSE:CTVA]Trading at 88% of their 52-week high, shares of Corteva now command a 458% premium to the agricultural production industry’s 9.3x P/E valuation. This year, a projected 22.2% EPS growth could justify markets paying a 53.6x P/E for the stock today.
As a critical pillar in the farming industry, institutions understand that the world will only raise its stocks-to-use ratio with Corteva's chemicals, and its market cap shows. The company's $38 billion jumps over CF Industries' $15 billion, and even The Mosaic Company's (NYSE: MOS) $9.7 billion.
Analysts at KeyCorp (NYSE: KEY) think the stock could go as high as $66 a share, or 21% above today’s price. The company’s quality and market positioning are evident in its 81.5% institutional ownership and the $22.9 billion in institutional inflows over the past 12 months.
Archer-Daniels, a Discount Play
[content-module:CompanyOverview|NYSE:ADM]This stock’s 9.5x P/E ratio comes at a discount of 17.3% to Deere’s valuation and an even steeper 82% discount to Corteva’s multiple. This makes sense, as this is the last company to get paid after the farming process, so markets won’t be too excited.
However, Bank of America Co. (NYSE: BAC) took the long view. Analysts at the bank slapped a $74 price target on the stock, calling for a 21.3% upside from its current price.
Shares of Archer-Daniels trade at only 70% of their 52-week high, bringing other signs of stability for those avoiding a stomach-churning run. A low beta of 0.7 coupled with a 3.3% dividend yield makes Archer-Daniels the place to be during these high inflation times.